Abstract
After decades of failed developmental efforts, many economies around the world employed the McKinnon-Shaw liberalization thesis to propel the development of their financial systems. Whiles some of these economies had success stories, others had frustrating outcomes. This study examines the financial liberalisation and financial development dynamics considering inflationary effects, in SSA spanning 2000 to 2019. We conducted preliminary tests to ascertain the suitability of the data for the study and then estimated the PVAR model. Impulse response functions and forecast error variance decompositions were obtained from the residuals of the model estimates. The study established a weak, long-run bidirectional relationship between liberalization and financial development, with liberalization accounting for about 0.09% of financial development, while financial development explains about 0.06% of liberalization shocks on average. It takes 3 to 5 years for the impact to manifest after policy implementation. The study further revealed a positive short-run bidirectional relationship between inflation and liberalization, and an inverse short-run bidirectional relationship between inflation and financial development. While inflation explains about 0.87 and 1.79% of liberalization and financial development shocks respectively, liberalization and financial developments respectively explain about 2.62 and 7.41% of inflation shocks on average. It takes 1 to 2 years for the impulse to manifest after policy implementation. We recommend that for financial liberalization policies to succeed, stable inflationary regime and the necessary preconditions for liberalization policies should be in place prior to the implementation of liberalization policies. Key words: Liberalization, financial development, endogeneity, exogeneity, stochastic trend, impulse response functions (irf), and forecast error variance decomposition (fevd).
Highlights
Misati and Nyamongo (2011) further revealed that the growth retarding effects of financial liberalization dominates its growth supporting effects in Sub-Sahara Africa (SSA). It appears the positive effects of liberalization dominate the negative effects as economies world-wide continually employ liberalisation efforts to enhance the efficiency of their financial systems (Abiad et al, 2005)
If the results show that all the eigen values lie within the unit circle, the VAR stability condition is satisfied, the PVAR model estimated is stable and robust
This study examined and validated the dynamic bidirectional nexus between financial liberalization and financial development in the presence of inflation in 19 SSA countries over the period 2000-2019 using a panel VAR framework
Summary
Karikari (2010) provides evidence that liberalization by itself did not enhance financial development in SSA during the 1996–2002 period; an evidence that corroborates Ghosh (2005) argument that there are many grounds for skepticism regarding the claims made by the votaries of financial liberalization efforts. Misati and Nyamongo (2011) further revealed that the growth retarding effects of financial liberalization dominates its growth supporting effects in Sub-Sahara Africa (SSA). It appears the positive effects of liberalization dominate the negative effects as economies world-wide continually employ liberalisation efforts to enhance the efficiency of their financial systems (Abiad et al, 2005). According to Ayouni et al (2014), financially liberalised economies seem to attract a disproportionately large share of FDI inflows, which have the potential to generate technology spill-over and serve as a conduit for passing on better management practices and competencies
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
