Decomposing The Effects Of Financial Liberalization: Crises Vs. Growth

The authors present a new empirical decomposition of the effects of financial liberalization on economic growth and on the incidence of crises. The empirical estimates show that the direct effect of financial liberalization on growth by far outweighs the indirect effect via a higher propensity to crisis. They also discuss several models of financial liberalization and growth whose predictions are consistent with the empirical findings. In this paper they propose an empirical framework that brings these two views together. They decompose the impact of international financial liberalization on growth into two effects: a positive direct effect and a negative indirect effect through a higher propensity to crisis.