Abstract
This paper examines the effect of financial liberalization on the financial stability of an economy using changes in sovereign credit ratings as the measure of financial stability. Using a panel dataset from 1970 to 2014, comprising of all the countries rated by Standard and Poor’s, Moody’s or Fitch, we employ system generalized method of moment approach to estimate the model. We reject the hypothesis that financial stability is independent of financial liberalization. Our results indicate a positive and significant impact of financial liberalization on financial stability. Furthermore, we find that sovereign ratings tend to be stable. Our results remain robust to a number of modifications in sample composition and changes in the period of analysis.
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