The effect of financial liberalization on economic growth: A panel data analysis of 38 countries

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: This paper empirically surveys the actual links between financial liberalization and economic growth by drawing lessons from both developed and emerging economies over 26 years. The macroeconomic indicators for economic growth are GDP per capita growth, growth volatility, and real lending interest rate. Previous researches hold differing views about whether the impact of liberalization reform on macroeconomic outcomes and financial indicators is positive theoretically, and they mainly focus on capital account liberalization. This paper uses a multidimensional database of financial liberalization and employs econometric approaches to examine the actual influences of liberalization in 38 countries, spanning the year 1980-2005. The main findings are the GDP grows faster and the growth volatility maintains more steadily in economies with more developed financial sectors; the impact of real interest rate is found to be nonlinear and depends on whether the countries are middle-income or high-income economies. These results imply the reform of liberalization increases GDP growth, maintain growth volatility, and has varying degrees of impacts in developed and emerging countries.

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