Financial Liberalization, Crises, And Economic Growth

It has been widely recognized that financial liberalization plays an important role in economic development. Although an expanding body of literature has documented this effect across space and time, the channel through which financial liberalization affects the economic growth remains unclear. This paper employs probity and panel regressions to show that financial liberalization is positively associated with economic growth, with the (positive) direct liberalization effect dominating the (negative) indirect crisis effect. Financial liberalization is expected to increase GDP growth by 0.92 percentage point in the whole sample and by 0.99 percentage point in crisis experienced countries, respectively. Financial liberalization contributes to economic growth even when the sample is restricted to countries that experienced financial crises.