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Does Financial Liberalization Spur Growth?

  • Geert Bekaert
  • Campbell R. Harvey
  • Christian Lundblad

We show that equity market liberalizations, on average, lead to a one percent increase in annual real economic growth over a five-year period. The liberalization effect is not spuriously accounted for by macro-economic reforms and does not reflect a business cycle effect. Although financial liberalizations further financial development, measures of financial development fail to fully drive out the liberalization effect. The investment/GDP ratio increases post liberalization, with the investment partially financed by foreign capital inducing worsened trade balances. Differentiating across liberalizing countries, a large secondary school enrollment, a small government sector and an Anglo-Saxon legal system tend to enhance the liberalization effect. Finally, the conditional convergence effect is larger once financial liberalization is accounted for.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8245.

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Date of creation: Apr 2001
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Publication status: published as Journal of Financial Economics, Vol. 77, no. 1 (July 2005): 3-55
Handle: RePEc:nbr:nberwo:8245
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