The Positive Link between Financial Liberalization, Growth and Crises
By A. Tornell, Frank Westermann, Lorenza Martínez. Social Science Research Network, 2004
228 citations recorded by the source corpus.
There is no agreement regarding the growth-enhancing effects of financial liberalization, mainly because it is associated with risky international bank flows, lending booms, and crises. In this paper we make the case for liberalization despite the occurrence of crises. We show that in developing countries trade liberalization has typically been followed by financial liberalization, which has indeed led to financial fragility and a greater incidence of crises. However, financial liberalization also has led to higher GDP growth. In fact, the fastestgrowing countries are typically those that have experienced boom-bust cycles. That is, there is a positive link between GDP growth and the bumpiness of credit, which is captured by the negative skewness - not by the variance - of credit growth. To substantiate our interpretation of the data we present a model that shows why in countries with severe credit market imperfections, liberalization leads to higher growth and, as a byproduct, to financial fragility. Thus, occasional crises need not forestall growth and may even be a necessary component of a developing country's growth experience. Finally, our analysis indicates that foreign direct investment does not obviate the need for risky international bank flows, as the latter are the only source of financing for most firms in the nontradables sector.
Subfields: Finance, Strategy and Management
View Paper: https://www.semanticscholar.org/paper/1661ffb2864872e2e8c8aebb32669a9a17c7e68e
How researchers see this paper
The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.
In Finance
In Strategy and Management
Citations in the corpus
- How Do Trade and Financial Integration Affect the Relationship between Growth and Volatility (2004, unknown): “that macroeconomic volatility could have a beneficial impact on economic growth (e.g., Blackburn, 1999; Ranciere et al., 2003; Tornell et al., 2004 ).”
- Same Financial Development yet Different Economic Growth--Why? (2006, background): “As part of their explanatory variables, Levine (1999), Bekaert, Harvey, and Lundblad (2005), Bonfiglioli and Mendicino (2004), and Tornell, Westermann, and Martinez (2004) have also considered these conditional variables.8 Our study, however, differs from those and other previous studies in that we…”
- Financial Integration, Productivity and Capital Accumulation (2008, unknown): “A recent literature on Þnancial fragility points out that crises may come along as by-products of sustained growth of the Þnancial system (see Ranciere et al., 2004 and Tornell et al., 2004).”