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The Effect of Financial Liberalization on the Economic Development Process in case of Inefficient Banking

  • Nabi, Mahmoud Sami
  • Rajhi, Taoufik

In this essay we develop a stylized model to investigate the role of external financial liberalization in the development process of a small economy. Firstly, we show that there exists an economic development threshold under which the capital account liberalization can not occur. Secondly, we show that in the presence of banking inefficiency, the financial liberalization presents a major risk for the economic development process. Indeed, if the economy is situated in a vulnerability region every bad performance of the investment sector could degenerate in a banking crisis delaying the development process by several periods relatively to the situation of closed economy. Finally, it is also shown that reducing the credit market imperfection decreases the likelihood of a banking crisis.

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File URL: http://mpra.ub.uni-muenchen.de/24514/1/MPRA_paper_24514.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24514.

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Date of creation: Sep 2002
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Handle: RePEc:pra:mprapa:24514
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  1. McKinnon, Ronald I & Pill, Huw, 1997. "Credible Economic Liberalizations and Overborrowing," American Economic Review, American Economic Association, vol. 87(2), pages 189-93, May.
  2. Kiminori Matsuyama, 2000. "Financial Market Globalization and Endogenous Inequality of Nations," Discussion Papers 1300, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. 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.
  4. Philip Arestis, 2002. "Financial crisis in Southeast Asia: dispelling illusion the Minskyan way," Cambridge Journal of Economics, Oxford University Press, vol. 26(2), pages 237-260, March.
  5. Russell Cooper & Dean Corbae, 2001. "Financial collapse and active monetary policy: a lesson from the Great Depression," Staff Report 289, Federal Reserve Bank of Minneapolis.
  6. Jeannine N. Bailliu, 2000. "Private Capital Flows, Financial Development, and Economic Growth in Developing Countries," Working Papers 00-16, Bank of Canada.
  7. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 1998. "Financial Liberalization and Volatility in Emerging Market Economies," Working Papers 98.02, Swiss National Bank, Study Center Gerzensee.
  8. N. Gregory Mankiw, 1986. "The Allocation of Credit and Financial Collapse," NBER Working Papers 1786, National Bureau of Economic Research, Inc.
  9. Bernanke, Ben & Gertler, Mark, 1990. "Financial Fragility and Economic Performance," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 87-114, February.
  10. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
  11. Michel Guillard & Taoufik Rajhi, 1994. "Une note sur les liens entre croissance et taux d'intérêt," Revue Économique, Programme National Persée, vol. 45(3), pages 751-766.
  12. By Jorge A. Chan-Lau & Zhaohui Chen, 2001. "Crash-Free Sequencing Strategies for Financial Development and Liberalization," IMF Staff Papers, Palgrave Macmillan, vol. 48(1), pages 7.
  13. Jeffrey H. Nilsen & Riccardo Rovelli, 1999. "Modering Financial Fragility In Transition Economies," Working Papers 99.03, Swiss National Bank, Study Center Gerzensee.
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