NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Does Financial Liberalization Spur Growth?

Geert Bekaert, Campbell R. Harvey, Christian Lundblad

NBER Working Paper No. 8245
Issued in April 2001
NBER Program(s):   AP   EFG

We show that equity market liberalizations, on average, lead to a one percent increase in annual real economic growth over a five-year period. The liberalization effect is not spuriously accounted for by macro-economic reforms and does not reflect a business cycle effect. Although financial liberalizations further financial development, measures of financial development fail to fully drive out the liberalization effect. The investment/GDP ratio increases post liberalization, with the investment partially financed by foreign capital inducing worsened trade balances. Differentiating across liberalizing countries, a large secondary school enrollment, a small government sector and an Anglo-Saxon legal system tend to enhance the liberalization effect. Finally, the conditional convergence effect is larger once financial liberalization is accounted for.

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Published: Journal of Financial Economics, Vol. 77, no. 1 (July 2005): 3-55

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