The impact of financial liberalization on macroeconomic dynamics: A two-country analysis

Abstract

This paper evaluates and compares the changing macroeconomic dynamics of two emerging countries, Turkey and India which contrast in terms of their degree of financial liberalization. It uses block exogeneity test (multivariate Granger-causality test) to examine whether the interrelations among the domestic variables alter and the international interdependence increases following the initiation of liberalization reforms. Results suggest that there is an increased interdependence among the fundamentals changing the transmission mechanism of monetary policy as the countries move towards financial liberalization process. There is also evidence on the increasing impact of foreign economies on Turkey’s and India’s macroeconomic variables while the long-run equilibrium relation between domestic and foreign variables is stronger for Turkey which is the fully liberalized case of the study.