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Financial openness is often associated with higher rates of economic growth. The authors 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. The authors 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. The authors find some indirect evidence of higher investment efficiency post-liberalization. The authors also document threshold effects: countries that are more financially developed or have higher quality of institutions experience larger productivity growth responses. Finally, the authors show that the growth boost from openness outweighs the detrimental loss in growth from global or regional banking crises.
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