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Before and After Financial Liberalization


  • Reinhart, Carmen
  • Tokatlidis, Ioannis


Given all the ambiguities about the outcomes of the financial liberalization process, it is relevant to ask what the systematic, cross-country evidence reveals on several questions, including: What happens to key macroeconomic and variables following domestic and external financial liberalization? Are there significant differences in the outcomes between emerging and developed economies? Are there regional patterns in the response to financial sector reforms? Does a country’s level of development shape the outcome of financial sector reforms? These are the questions we focus on in this paper. With greater certainty, financial liberalization appears to deliver: higher real interest rates (possibly reflecting the allocation of capital toward more productive, higher return projects.); lower investment, but not lower growth (again, possibly owing to a shift to more productive uses of financial resources); a higher level of foreign direct investment; and high gross capital flows--the catch is that occurs only in the higher income countries. Liberalization appears to deliver financial deepening, as measured by the credit and monetary aggregates--but, again, low income countries do not appear to show clear signs of such a benefit As regards saving, anything goes. In some regions saving increased following financial sector reforms; but in the majority of cases saving declined following the reforms.

Suggested Citation

  • Reinhart, Carmen & Tokatlidis, Ioannis, 2005. "Before and After Financial Liberalization," MPRA Paper 6986, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:6986

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    References listed on IDEAS

    1. Nicola Rossi, 1988. "Government Spending, the Real Interest Rate, and the Behavior of Liquidity-Constrained Consumers in Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 35(1), pages 104-140, March.
    2. Schmidt-Hebbel, Klaus & Webb, Steven B & Corsetti, Giancarlo, 1992. "Household Saving in Developing Countries: First Cross-Country Evidence," World Bank Economic Review, World Bank Group, vol. 6(3), pages 529-547, September.
    3. Hamid Faruqee & Aasim M. Husain, 1995. "Saving Trends in Southeast Asia; A Cross-Country Analysis," IMF Working Papers 95/39, International Monetary Fund.
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    More about this item


    financial liberalization; developing; advanced; saving; capital flows;

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F3 - International Economics - - International Finance
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit


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