Financial Liberalization, Crises, and Economic Growth

Abstract

The paper computes the effect of financial liberalization on economic growth by combining the results of a panel model with those of a probit model. It finds a positive net effect from financial liberalization to growth. Surprisingly, we find that the net effect on growth is larger in the crisis-experienced country group than in the overall sample group. Our guess is that the crisis-experienced countries are mostly developing countries that usually enjoy higher growth rates than the developed countries because of the catching-up phenomenon. The paper also studies the link between financial liberalization and nominal interest rates, and finds, contrary to expectations, that the direct liberalization effect is positive. Our guess is that this reflected the overshooting of interest rates after crises. (c) 2008 The Earth Institute at Columbia University and the Massachusetts Institute of Technology.

Financial Repression is Knocking at the Door, Again

“…The coefficient of financial repression in the Probit equations for a debt crisis is significant and negative, suggesting that financial repression (as measured by the FRI index) could reduce the risk of a crisis. This result can be compared with the findings of Lee and Shin (2008) and Rancière, Tornell, and Westermann (2006), who found that financial repression reduces the risk of a financial crisis. A change in the FRI value in the previous three years (full liberalization, or the introduction of controls) also appears with a significant coefficient of the same sign, but of lower magnitude and at a lower confidence level, while a more general change in the interest control regime does not exhibit a significant coefficient.…”

“…13 Among others, Achy (2003); Bekaert, Harvey, and Lundblad (2005); Ben Gamra (2009); Bussière and Fratzscher, (2008); Bonfiglioli and Mendicino (2004); Garita (2009); Lee and Shin (2008); McLean and Shreshta (2002); Rancière, Tornell, and Westermann (2006); Romero-Àvila (2009); and Tornell, Westermann, and Martinez (2004). See the metastudy compiled by Bumann, Hermes, and Lensink (2013).…”

“…Thus, financial repression has an impact on the probability of crisis and an indirect impact on per capita growth. This effect has been analyzed empirically (e.g., Lee and Shin 2008;Rancière, Tornell, and Westermann 2006). Following the methodology used in these studies, we apply probit panel data methods to estimate the impact of financial repression on the probability that a country may experience a debt crisis.…”

“…The financial liberalization-growth nexus continues to be the subject of much empirical research. Altogether, the evidence is inconclusive: while several studies highlighted a positive impact of liberalization on growth (Levine, Loayza, and Beck 2000;Tornell, Westermann, and Martinez 2004;Bonfiglioli and Mendicino 2004;Bonfiglioli 2005;Rancière, Tornell, and Westermann 2006;Lee and Shin 2008;Romero-Àvila 2009; Burmann 2013), others found a negative impact (Eichengreen and Leblang 2003;Bashar and Khan 2007;Ahmed 2013), and a third group found ambiguous or insignificant results (Arestis and Demetriades 1997;McLean and Shreshta 2002;Dawson 2003;Boot 2000;Bussière and Fratzscher 2008) or highlighted that the impact varied due to specific circumstances, including the intensity of liberalization (Ben Gamra 2009).…”

Has Financial Liberalisation Promoted Economic Growth in Nigeria? Evidence from Auto-Regressive Distributed Lag (ARDL) Approach

“…Lee and Shin (2008) dissected the effects of financial liberalisation into direct and indirect effects. The direct effects are clearly the benefits that arise in terms of the removal of frictions in the markets, thus leading to lower borrowing costs.…”