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The Theory of Financial Liberalization and its Economic Impact: An Assessment

In: Financial Liberalization in Developing Countries

Author

Listed:
  • Abdullahi Dahir Ahmed

    (Victoria University)

  • Sardar M. N. Islam

    (Victoria University)

Abstract

Led by the seminal papers of McKinnon (1973) and Shaw (1973), a significant number of studies have pointed out that financial liberalization can exert a positive effect on growth rates as interest rate levels rise towards their competitive market equilibrium, while resources are efficiently allocated. Accordingly, eliminating controls on interest rates and allowing them to increase could stimulate a higher level of savings. Moreover, with the assumption of a strong response of savings to the rate of interest, higher interest rates are expected to increase financial intermediation (the level of financial asset channelled by the financial system).1 Strictly under these strong assumptions, it is likely that financial liberalization produces higher savings which ultimately fosters economic development through changes in quality (by allowing efficient allocation of resources) and quantity of investment (Reinhart & Tokatlidis, 2003).

Suggested Citation

  • Abdullahi Dahir Ahmed & Sardar M. N. Islam, 2010. "The Theory of Financial Liberalization and its Economic Impact: An Assessment," Contributions to Economics, in: Financial Liberalization in Developing Countries, chapter 0, pages 91-140, Springer.
    • Handle: RePEc:spr:conchp:978-3-7908-2168-0_4
    DOI: 10.1007/978-3-7908-2168-0_4
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