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How Does Financial Liberalization affect Economic Growth?

This paper assesses the effects of international financial liberalization and banking crises on investments and productivity in a sample of 93 countries (at its largest) observed between 1975 and 1999. I provide empirical evidence that financial liberalization spurs productivity growth and marginally affects capital accumulation. Banking crises depress both investments and TFP. Both levels and growth rates of productivity respond to financial liberalization and banking crises. The paper also presents evidence of conditional convergence in productivity across countries. However, the speed of convergence is unaffected by financial liberalization. These results are robust to a number of econometric specifications.

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Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 736.

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Length: 38 pages
Date of creation: 10 May 2005
Date of revision:
Handle: RePEc:hhs:iiessp:0736
Contact details of provider: Postal: Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden
Phone: +46-8-162000
Fax: +46-8-161443
Web page: http://www.iies.su.se/

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  1. Geert Bekaert & Campbell R. Harvey & Christian Lundblad, 2004. "Does Financial Liberalization Spur Growth?," Working Paper Research 53, National Bank of Belgium.
  2. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
  3. Levine, Ross & Loayza, Norman & Beck, Thorsten, 1999. "Financial intermediation and growth : Causality and causes," Policy Research Working Paper Series 2059, The World Bank.
  4. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  5. Caselli, Francesco & Esquivel, Gerardo & Lefort, Fernando, 1996. " Reopening the Convergence Debate: A New Look at Cross-Country Growth Empirics," Journal of Economic Growth, Springer, vol. 1(3), pages 363-89, September.
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    • Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," NBER Working Papers 5661, National Bureau of Economic Research, Inc.
    • Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, . "Law and Finance," Working Paper 19451, Harvard University OpenScholar.
  7. Levine, Ross & Zervos, Sara, 1998. "Stock Markets, Banks, and Economic Growth," American Economic Review, American Economic Association, vol. 88(3), pages 537-58, June.
  8. Philippe Aghion & Peter Howitt & David Mayer-Foulkes, 2005. "The Effect of Financial Development on Convergence: Theory and Evidence," The Quarterly Journal of Economics, MIT Press, vol. 120(1), pages 173-222, January.
  9. Peter Klenow & Andrés Rodríguez-Clare, 1997. "The Neoclassical Revival in Growth Economics: Has It Gone Too Far?," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 73-114 National Bureau of Economic Research, Inc.
  10. Bond, Stephen & Bowsher, Clive & Windmeijer, Frank, 2001. "Criterion-based inference for GMM in autoregressive panel data models," Economics Letters, Elsevier, vol. 73(3), pages 379-388, December.
  11. Ross Levine, 2004. "Finance and Growth: Theory and Evidence," NBER Working Papers 10766, National Bureau of Economic Research, Inc.
  12. Romain Ranciere & Aaron Tornell & Frank Westermann, 2002. "Systemic Crises and Growth," Working Papers 190, Barcelona Graduate School of Economics.
  13. Caselli, Francesco, 2005. "Accounting for Cross-Country Income Differences," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 9, pages 679-741 Elsevier.
  14. Alessandra Bonfiglioli & Caterina Mendicino, 2004. "Financial liberalization, bank crises and growth: Assessing the links," Economics Working Papers 946, Department of Economics and Business, Universitat Pompeu Fabra.
  15. Philippe Martin & Hélène Rey, 2005. "Globalization and Emerging Markets: With or Without Crash?," NBER Working Papers 11550, National Bureau of Economic Research, Inc.
  16. Levine, Ross, 2001. "International Financial Liberalization and Economic Growth," Review of International Economics, Wiley Blackwell, vol. 9(4), pages 688-702, November.
  17. Carlos Arteta & Barry Eichengreen & Charles Wyplosz, 2001. "When Does Capital Account Liberalization Help More than It Hurts?," NBER Working Papers 8414, National Bureau of Economic Research, Inc.
  18. Philippe Bacchetta & Eric van Wincoop, 1998. "Capital flows to Emerging Markets: Liberalization, Overshooting, and Volatility," Working Papers 98.01, Swiss National Bank, Study Center Gerzensee.
  19. Beck, Thorsten & Levine, Ross & Loayza, Norman, 1999. "Finance and the sources of growth," Policy Research Working Paper Series 2057, The World Bank.
  20. Psacharopoulos, George, 1994. "Returns to investment in education: A global update," World Development, Elsevier, vol. 22(9), pages 1325-1343, September.
  21. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
  22. Beck, Thorsten & Levine, Ross, 2001. "Stock markets, banks, and growth : correlation or causality?," Policy Research Working Paper Series 2670, The World Bank.
  23. Asli Demirgüç-Kunt & Enrica Detragiache, 1998. "The Determinants of Banking Crises in Developing and Developed Countries," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 81-109, March.
  24. Asli Demirgüç-Kunt & Enrica Detragiache, 2000. "Does Deposit Insurance Increase Banking System Stability?," IMF Working Papers 00/3, International Monetary Fund.
  25. Bonfiglioli, Alessandra & Mendicino, Caterina, 2004. "Financial Liberalization, Banking Crises and Growth: Assessing the Links," SSE/EFI Working Paper Series in Economics and Finance 567, Stockholm School of Economics.
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