Financial Openness and Productivity

Abstract

Summary. -Financial openness is often associated with higher rates of economic growth. We show that the impact of openness on factor productivity growth is more important than the effect on capital growth. This explains why the growth effects of liberalization appear to be largely permanent, not temporary. We attribute these permanent liberalization effects to the role financial openness plays in stock market and banking sector development, and to changes in the quality of institutions. We find some indirect evidence of higher investment efficiency post-liberalization. We also document threshold effects: countries that are more financially developed or have higher quality of institutions experience larger productivity growth responses. Finally, we show that the growth boost from openness outweighs the detrimental loss in growth from global or regional banking crises.

Financial Flexibility, Bank Capital Flows, and Asset Prices

“…Empirically, these variables indeed seem to be related. In a recent cross‐country study, Bekaert, Harvey, and Lundblad (2011) find a strong positive relationship between the private credit to GDP ratio—which within our model could be interpreted as the bank share, —and the risk of a banking sector crisis. Moreover, they find some evidence of a positive relation between market liberalization—which within our model could be interpreted as financial flexibility, —and the risk of a bank crisis, although the costs of such crises are outweighed by the benefits of increased liberalization.…”

Financial Regulation, Financial Globalization, and the Synchronization of Economic Activity

“…The literature on the determinants of world market integration (e.g., Kose, Otrok, and Prasad (2012), Bekaert et al. ()) explores the effect of various institutional and financial development indicators (such as creditor's rights, property rights institutions, private credit, etc.). Since most of the usual proxies for institutional efficiency exhibit little within‐country variability, they are captured by the country‐pair fixed effects.…”

“…For the broader literature that quantifies the effects of financial integration on economic growth, output volatility, and risk sharing, see Bekaert, Harvey, and Lundblad (, , ), Bekaert et al. (), Henry (), Kose et al.…”

Financial Liberalization and Stock Market Efficiency: Causality Analysis of Emerging Markets

“…This strand of studies explains that positive impacts of market liberalization are only visible under a developed financial system and improved institutions (see Fuchs-Schundeln & Funke, 2003;Galindo et al, 2007;Huang & Huang, 2008;Kaminsky & Schmukler, 2008;Chen, 2009;Ayhan Kose et al, 2011;Bekaert et al, 2011). This strand of studies explains that positive impacts of market liberalization are only visible under a developed financial system and improved institutions (see Fuchs-Schundeln & Funke, 2003;Galindo et al, 2007;Huang & Huang, 2008;Kaminsky & Schmukler, 2008;Chen, 2009;Ayhan Kose et al, 2011;Bekaert et al, 2011).…”