Financial liberalisation in the emerging market economies

Abstract

Financial repression and distortions were common in the past. The emerging market economies earnestly began liberalising their financial sectors, which had macro- and microeconomic as well as static and dynamic ramifications. Deregulation and liberalisation were responsible for creating an environment that engendered economic growth. The allocative efficiency view supported the liberalisation-growth nexus, while the newer ‘animal spirit’ view considered this link fanciful. Although capital account liberalisation has been accused of creating domestic and global volatility, shunning it as a permanent policy measure has not won many supporters in the policy-making world. In this paper, the author provides empirical evidence to show that liberalisation of stock markets in the emerging market economies caused smoothening of the boom–bust cycles in the medium term, although the short-term effect of liberalisation was found to be very different.