Financial Liberalization Measures Research Articles

How consistent are measures of financial liberalization in assessing its impact on bank cost efficiency? A cross–country empirical analysis

AbstractUsing a sample of commercial bank–year observations covering 104 countries over the 1999–2017 period, we consider five contemporary de jure and de facto indicators of financial liberalization to provide a comparative assessment of their impact on bank cost efficiency. With the sole exception of one de jure index, all other financial liberalization measures consistently indicate an improvement in cost efficiency. We also compare the effects before and after the 2007 global financial crisis, which instigated a policy shift from deregulation to prudential re–regulation. We find that prudential re–regulation did not detrimentally affect bank cost efficiency. Our results for the main financial liberalization measures hold irrespective of countries’ stage of economic development and prove robust to re–estimations based on a single-country efficiency frontier for the US, alternative model specifications and methodologies that account for endogeneity and cross section dependence. The key policy implication from our findings is that prudential policies aimed at fostering stability and less bank risk–taking, can be pursued without any risks of hindering financial intermediation and lowering bank cost efficiency.

Capital Account Liberalization Institutions and Economic Growth in the Emerging World

Purpose: The relationship between capital account liberalization and economic growth has been a fervently discussed subject among economists and policy-makers. The role of institutions is imperious to comprehensively investigate the impact of financial openness on growth. The objective of the study is to inspect the nexus between financial liberalization and economic growth after incorporating the contribution of institutional quality.
 Methodology: A panel of data on 17 emerging market economies (EMEs) is used for the period 1995-2019. We employ the GMM technique by using different de facto and de jure measures of financial liberalization along with institutional variables.
 Findings: The empirical results illustrate that better quality institutions strengthen the connection between capital account liberalization and output growth in the emerging World.
 Implications: The policymakers should focus on the more beneficial nature of financial liberalization such as FDI. Also, the policy should be aiming at availing the services of efficient human resources with proper institutional infrastructure.

COMMERCIAL BANKING PERFORMANCE AND ECONOMIC GRPWTH: THE CASE OF TUNISIA BETWEEN 19902018

In this paper, we propose to assess the efficiency scoretechniques of 10 Tunisian commercial banks for the period cover 1990 to 2018. The local banking landscape was marked, during the period studied, by significant changes following the adoption by the Tunisian government, of various financial liberalization measures as well as the period of the subprime crisis and then the revolution of 2011. Given studying the technical efficiency levels achieved by Tunisian commercial banks, we propose a non-parametric method, the approach DEA, data envelopment analysis, on the one hand, and the determination of the variables explaining the level of performance on the other. Our results allow us to conclude that the banks which obtained the best average efficiency scores are: Amen Bank (100%) and Arab Tunisian Bank (98.9%). Whereas, other banks are considered inefficient. To study the impact of banking performance indicators, a variable that measures the crisis, Equity, total assets, and total liabilities on the efficiency scores calculated by the DEA methodology, return on assets (ROA) and return on equity (ROE), we used an ECM error correction model in panel data. The results show the positive impacts of these indicators on banking performance in Tunisia.

Financial liberalization, political institutions, and income inequality

Rising income inequality coinciding with financial liberalization has stimulated extensive studies on the possible links between income inequality and different forms of financial liberalization, both inputs and outputs, since the 1990s. Nonetheless, empirical investigations remain inconclusive. To provide new and robust evidence, this study investigates the distributional repercussions of financial liberalization and the role played by democratization in this process. Focusing on the outcome measures of financial liberalization, we find, in a panel of developing and developed countries for 1989–2011, that (1) financial openness alleviates income inequality, particularly for less democratic countries; (2) stock market development mitigates income inequality, whereas its volatility exacerbates it, with both effects decreasing with democratization; (3) banking development strengthens income inequality, whereas its volatility alleviates it, with both effects again moderating with democratization; and (4) these effects are mediated by human capital accumulation and entrepreneurship development. The data thus suggest that financial reforms toward capital account openness and more liquid, stable stock markets are beneficial to income distribution, as such reforms allow more previously excluded households and firms to access financial funds and services, thereby increasing human capital and entrepreneurship, especially in less democratic countries.

Has Financial Liberalisation Promoted Economic Growth in Nigeria? Evidence from Auto-Regressive Distributed Lag (ARDL) Approach

This study attempted to ascertain whether or not financial liberalisation policies promoted economic growth in Nigeria for the period spanning 1986 –2014, using Auto-regressive Distributed Lag (ARDL)-bounds testing approach and unrestricted error correction model (UECM) to cointegration analysis. Macroeconomic time series data were obtained from Central Bank of Nigeria (CBN) Annual Statistical Bulletins, National Bureau of Statistics (NBS) Bulletins, and World Bank Development Indices. Three alternative measures of financial liberalisation (FINDEX1, FINDEX2, FINDEX3) and six intervening variables were incorporated into the study. The empirical findings show that the impact of financial liberalization on economic growth varied for different measures of financial liberalization undertaken; and were significant both in the short run and the long run: FINDEX1 promoted economic growth significantly, and corroborates the growth-stimulating effect of financial liberalization; while FINDEX2 and FINDEX3 exerted significant negative impacts on economic growth. Real exchange rate, degree of openness, consumer price index, increase in life expectancy of labour, and debt service ratio significantly influenced economic growth in the short run and long run. None of the measures of financial liberalisation Granger-caused economic growth, but a one-way causation ran from FINDEX2 to FINDEX1, and from FINDEX3 to FINDEX1.The study recommends increased financial deepening, reduction of lending rates, removal of bottlenecks in the banking and stock markets institutions in Nigeria.

Financial liberalization, financial regulation and bank efficiency: a multi-country analysis

This article investigates the impact of financial reforms on bank efficiency. More specifically, we distinguish between two different types of financial reforms, i.e. financial liberalization measures and measures of the quality of bank regulation and supervision (i.e. financial regulation), and study their relationship to bank efficiency separately. Moreover, we analyse whether the impact of financial liberalization on bank efficiency is conditional on the quality of regulation and supervision of the banking system. We apply stochastic frontier analysis to calculate bank efficiency at the individual bank level and use a new and detailed database that measures different aspects of financial reforms. The data-set consists of 87 312 bank-year observations covering 61 countries for the period 1996–2005. Overall, we show that the impact of financial liberalization policies on bank efficiency is conditional on the extent to which bank regulation and supervision has been adopted and developed.

Financial liberalisation and international market interdependence: Evidence from China’s stock market in the post-WTO accession period

This paper studies China’s stock market with respect to financial liberalization and international market interdependence after its accession to the WTO in 2001. Using the multi-factor R-squared measure, we derive a normalized index to measure the impact of financial liberalization policies on stock market interdependence between China and the world. Some of China’s financial liberalization measures, such as QFII and exchange rate reform, are found to have played an important role in increasing market interdependence. After the US credit crunch in 2007 and the world financial crisis in the following years, some anomalies were observed as China’s stock market was more interdependent of the global market than the US stock market in some specific periods. These anomalies may have been related to the former’s overreaction and economic overheating.

Growth, productivity and capital accumulation: The effects of financial liberalization in the case of European integration

In the present contribution, I concentrate on the process of financial liberalization in a specific context of European economic and monetary integration. I implement de facto and de jure measures of financial liberalization and find that formal aspects of financial openness generate a strongly positive impact on economic growth and its sources, productivity growth and capital accumulation. Moreover, there is evidence of a positive contribution to the process stemming from the EU membership, while no substantial effect comes from the euro adoption. Finally, I investigate the effects from financial integration on country groups within the EU.

Financial Liberalization, Growth, Productivity and Capital Accumulation: The Case of European Integration

In the present contribution, we concentrate on the process of financial liberalization in a specific context of European economic and monetary integration. We implement de facto and de jure measures of financial liberalization and find that formal aspects of financial openness generate a strongly positive impact on economic growth and its sources, productivity growth and capital accumulation. Moreover, there is evidence of a positive contribution to the process stemming from the EU membership, while no substantial effect comes from the euro adoption. Finally, we investigate the effects from financial integration on country groups within the EU.

A New Database of Financial Reforms

This paper introduces a new database of financial reforms covering 91 economies over 1973–2005. It describes the content of the database, the information sources utilized, and the coding rules used to create an index of financial reform. It also compares the database with other measures of financial liberalization, provides descriptive statistics, and discusses some possible applications. The database provides a multifaceted measure of reform, covering seven aspects of financial sector policy. Along each dimension the database provides a graded (rather than a binary) score, and allows for reversals.

Liberalization of capital controls and interest rates restrictions in the EU-15: did it affect economic growth?

This article studies the effect that the process of capital controls lifting and interest rate deregulation have brought about on growth in the EU-15 over the period 1960–2001. The evidence supports the existence of a positive growth impact from the liberalization of both capital controls and interest rate restrictions. These financial liberalization measures affect growth even after controlling for other growth policies and they are robust to business cycle effects that could spuriously drive the relation. Some tentative evidence indicates that the liberalization of capital controls and the deregulation of interest rates have effected growth through the increase in the efficiency of financial intermediation.

Financial Reform and Bank Efficiency: A Multi-Country Analysis

This paper investigates the impact of financial reform on bank efficiency. More specifically, we distinguish between financial liberalization measures and measures of the quality of bank regulation measures, and study their relationship to bank efficiency separately. Moreover, we analyze whether the impact of financial liberalization on bank efficiency is conditional on the quality of prudential regulation of the banking system. We apply stochastic frontier analysis to calculate bank efficiency at the individual bank level and use a new and detailed database that measures different aspects of financial reform. The dataset consists of a sample of over 26,000 bank-year observations from 41 countries for the period 1996-2002. Overall, we find support for the positive impact of financial liberalization policies, as well as for the quality of bank regulation, on bank efficiency. Moreover, we show that the impact of financial liberalization policies is conditional on the extent to which bank regulation has been adopted.

Financial Liberalization Policies and Economic Growth: Panel Data Evidence from Sub‐Saharan Africa

Abstract: The paper conducts an empirical investigation into the effects of financial liberalization policies on the growth of 19 countries in sub‐Saharan Africa (SSA). Two indexes are constructed which measure the gradual progression and institutional changes involved in financial liberalization. Because these indexes track specific financial liberalization policies, they provide better measures of financial liberalization than the indicators of financial development often used in the literature. Panel data estimates show a significant positive relationship between economic growth and financial liberalization policies. Our results are robust to alternative specifications of the model, and also across slow‐ and fast‐growing countries.

Household Debt and Income Inequality, 1963–2003

I construct an economy with heterogeneous agents that mimics the time‐series behavior of the earnings distribution in the United States from 1963 to 2003. Agents face aggregate and idiosyncratic shocks and accumulate real and financial assets. I estimate the shocks that drive the model using data on income inequality, aggregate income, and measures of financial liberalization. I show how the model economy can replicate two empirical facts: the trend and cyclical behavior of household debt and the diverging patterns in consumption and wealth inequality over time. While business cycle fluctuations can account for the short‐run changes in household debt, its prolonged rise of the 1980s and the 1990s can be quantitatively explained only by the concurrent increase in income inequality.

A New Database of Financial Reforms

This paper introduces a new database of financial reforms, covering 91 economies over 1973–2005. It describes the content of the database, the information sources utilized, and the coding rules used to create an index of financial reform. It also compares the database with other measures of financial liberalization, provides descriptive statistics, and discusses some possible applications. The database provides a multi-faceted measure of reform, covering seven aspects of financial sector policy. Along each dimension the database provides a graded (rather than a binary) score, and allows for reversals.

Does financial liberalization improve the allocation of investment?

Abstract Using firm level panel data from 12 developing countries we explore whether financial liberalization improves the efficiency with which investment funds are allocated. A summary index of the efficiency of investment allocation that measures whether investment funds are going to firms with a higher marginal return to capital is developed. We examine the relationship between this and various measures of financial liberalization and find that liberalization increases the efficiency with which investment funds are allocated. This holds after various robustness checks and is consistent with firm level evidence of a stronger association between investment and fundamentals after financial liberalization.

Does Financial Liberalization Improve the Allocation of Investment? Micro Evidence from Developing Countries

Has financial liberalization improved the efficiency with which investment funds are allocated to competing uses? In this paper, we address this question using firm level panel data from twelve developing countries. We develop a summary index of the efficiency of investment allocation that measures whether, and to which extent, investment funds are going to firms with a higher marginal return to capital. We then examine the relationship between this index and various measures of financial liberalization. The results suggest that financial reform tends to lead to an increase in the efficiency with which investment funds are allocated. This conclusion holds after a series of robustness checks and is consistent with firm level evidence we present suggesting that the association between investment and fundamentals has become stronger with financial liberalization.

FINANCIAL LIBERALIZATION AND ECONOMIC GROWTH: A THEORETICAL ANALYSIS OF THE TRANSFORMING CHINESE ECONOMY

Abstract. We conduct a theoretical investigation into how financial reforms are affecting the long‐run economic performance of the partially reformed Chinese economy. In a model with a dual structure in commodity production and financial repression, allowing the co‐existence of a state banking system and an informal credit market and introducing heterogeneity in the transaction technologies of individuals, we examine the interactions between the state banking system and the informal credit market, and the effects of various measures of financial liberalization on individuals’ optimal portfolio choices and the macroeconomic aggregates.

Does Financial Liberalization Improve the Allocation of Investment?: Micro Evidence from Developing Countries

Has financial liberalization improved the efficiency with which investment funds are allocated to competing uses? In this paper, we address this question, using firm level panel data from twelve developing countries. The basic idea is to investigate whether financial liberalization has increased the share of investment going to firms with a higher marginal return to capital. To this end we develop a summary index of the efficiency of allocation of investment. We then examine the relationship between this index and various measures of financial liberalization. The results suggest that in the majority of cases financial reform has lead to an increase in the efficiency with which investment funds are allocated.

The impact of liberalization and foreign investment in Colombia's financial sector

This study analyzes financial liberalization measures undertaken in 1990, of which an opening to foreign investment was a major component. After a brief description of the major changes in legislation on foreign investment, we compare performance of foreign-owned vs. domestic banks, first using a descriptive approach, then in a more systematic manner using econometric analysis. Panel data estimations reveal that financial liberalization in general had a beneficial impact on bank behavior in Colombia, by increasing competition, lowering intermediation costs and improving loan quality. Although the positive contribution of foreign entry may be overstated in recent studies by not controlling for other liberalization factors, foreign (and domestic) entry beginning in 1990 did improve bank behavior by enhancing operative efficiency and competition. However, the greater competition may have resulted in increased risk and a subsequent deterioration in loan quality, particularly among domestic banks.