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

Popov, Alexander A., Financial Liberalization, Growth, and Risk (January 15, 2011). Available at SSRN: https://ssrn.com/abstract=1785671 or http://dx.doi.org/10.2139/ssrn.1785671

Alexander A. Popov (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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