Abstract
This paper investigates and compares the effect of financial liberalization on economic activity of developed and emerging economies, and explores the channels of capital accumulation and total factor productivity improvements through which economic activity can be enhanced. The theoretical and empirical literature has been marred with inconclusiveness because of, inter alia, clubbing different country groups together; addressing equity liberalization inadequately; leaving banking liberalization unaddressed; scantily covering the channels of economic activity; and measuring financial liberalization inadequately. Against this background, our sample consists of nine major developed and nine major emerging economies over a period of 1971–2013. We used panel data modeling technique and estimated a two-step GMM model to overcome the issue of endogeneity. We find financial liberalization to enhance economic activity in both set of countries; capital accumulation in the emerging economies; and TFP improvements in developed economies. Banking liberalization effect in emerging economies albeit is insignificant.
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Notes
Zhen (2012) indicates that policy choices in the neighboring countries impact the policy decisions of a country through multiple mechanisms such as increased difficulty in attracting foreign flows for a given country if it chooses not to liberalize when its neighbor does.
Murphy and Siedschlag (2011) show that value added and employment in ICT-intensive industries grew relatively faster in countries with a higher ex ante human capital stock.
Hanushek and Kimko (2000), made an important distinction between the quantity and quality of education.
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Bhatia, A., Sharma, H.R. Financial liberalization and channels of growth: a comparative study of developed and emerging economies. Ind. Econ. Rev. 54, 81–119 (2019). https://doi.org/10.1007/s41775-019-00038-5
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DOI: https://doi.org/10.1007/s41775-019-00038-5