Financial Liberalization, Growth, and Risk
60 Pages Posted: 15 Mar 2011
Date Written: January 15, 2011
Abstract
We analyze output growth and risk as the joint outcomes of financial liberalization. Using an industry panel of 55 countries over 45 years, we find that financial liberalization results simultaneously in higher growth and in higher growth variability, measured both as the volatility and the left skewness of the growth process. These effects are stronger in industries that are more externally dependent and face better growth opportunities. Some of the effect of liberalization on growth goes through the channel of increased risk, implying that treating growth and risk independently may overestimate the direct growth effect of liberalization. We also find that the growth benefits of financial liberalization and its costs associated with higher risk are mitigated by strong institutions.
Keywords: financial liberalization, growth, risk, development
JEL Classification: E32, F30, F36, F43, G15
Suggested Citation: Suggested Citation
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