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Does Financial Liberalization Spur Growth

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TLDR
This paper showed that equity market liberalization, on average, leads to a 1% increase in annual real economic growth and that the largest growth response occurs in countries with high-quality institutions.
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This article is published in Journal of Financial Economics.The article was published on 2005-07-01 and is currently open access. It has received 1460 citations till now. The article focuses on the topics: Liberalization & Equity (finance).

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Citations
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Journal ArticleDOI

What Matters for Financial Development? Capital Controls, Institutions, and Interactions

TL;DR: In this article, the authors investigate whether financial openness leads to financial development after controlling for the level of legal development using a panel encompassing 108 countries over the period 1980 to 2000, and find that trade openness is a prerequisite for capital account liberalization while banking system development is a precondition for equity market development.
Journal ArticleDOI

Corporate Governance, Economic Entrenchment, and Growth

TL;DR: The economic entrenchment of large corporations is studied in this article, where the authors posit a relationship between the distribution of corporate control and institutional development that generates and preserves economic entropy.
ReportDOI

Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence

TL;DR: In this paper, the authors argue that the global financial cycle is not aligned with countries' specific macroeconomic conditions and propose a convex combination of targeted capital control, macroprudential control, and stricter limit on leverage for all financial intermediaries.
Journal ArticleDOI

Financing Innovation and Growth: Cash Flow, External Equity, and the 1990s R&D Boom

TL;DR: In this article, the authors estimate dynamic R&D models for high-tech firms and find significant effects of cash flow and external equity for young, but not mature, firms.
Book ChapterDOI

Chapter 12 Finance and Growth: Theory and Evidence

TL;DR: The authors reviewed, appraises, and critiques theoretical and empirical research on the connections between the operation of the financial system and economic growth, concluding that both financial intermediaries and markets matter for growth and that reverse causality alone is not driving this relationship.
References
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Journal ArticleDOI

On the mechanics of economic development

TL;DR: In this article, the authors consider the prospects for constructing a neoclassical theory of growth and international trade that is consistent with some of the main features of economic development, and compare three models and compared to evidence.
Journal ArticleDOI

Law and Finance

TL;DR: In this article, the authors examined legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries and found that common-law countries generally have the strongest, and French civil law countries the weakest, legal protections of investors, with German- and Scandinavian-civil law countries located in the middle.
Journal ArticleDOI

Legal Determinants of External Finance

TL;DR: The authors showed that countries with poorer investor protections, measured by both the character of legal rules and the quality of law enforcement, have smaller and narrower capital markets than those with stronger investor protections.
Journal ArticleDOI

Investor Protection and Corporate Governance

TL;DR: In this article, the authors argue that the legal approach is a more fruitful way to understand corporate governance and its reform than the conventional distinction between bank-centered and market-centered financial systems, and discuss the possible origins of these differences, summarize their consequences, and assess potential strategies of corporate governance reform.
ReportDOI

A Model of Growth Through Creative Destruction

Philippe Aghion, +1 more
- 01 Mar 1992 - 
TL;DR: In this paper, a model of endogenous growth is developed in which vertical innovations, generated by a competitive research sector, constitute the underlying source of growth and equilibrium is determined by a forward-looking difference equation, according to which the amount of research in any period depends upon the expected amount of the research next period.
Frequently Asked Questions (14)
Q1. What are the contributions in this paper?

This paper found that financial liberalization is important for economic growth in low-income and high-income countries. 

Economic growth rates, the components of GDP (consumption, government, investment and trade), and the official financial liberalization indicator are available for all samples. 

Financial liberalization may affect economic growth by reducing capital market imperfections, which might in turn reduce the external finance premium. 

Since financial liberalization has a temporal dimension, their econometric methodology uses a General Method of Moments estimator (Hansen (1982)) on panel data with overlapping observations. 

Sachs and Warner (1995a) emphasize that policy choices, such as respect for private property rights and open international trade, are particularly important determinants of long-run growth prospects. 

To maximize the time-series content in their regression, the authors use overlapping data and deal with the resulting moving average component in the residuals by adjusting the standard errors as a cross-sectional extension to Newey and West (1987). 

Islam’s (1995) main motivation in using panel techniques is the fact that allowing for fixed effects will mitigate the omitted variable problem that plagues the usual regression setup. 

Since their sample is relatively short, starting only in 1980, and many liberalizations only occurred in the 1990s, the use of k = 10, which is typical in the literature, is problematic. 

This motivates us to use k = 5 for most of their tables, but the authors ran the data through for k = 3, k = 7 and k = 10 as well, finding the main results to be resilient to the choice of k. 

the authors will examine the relationship between liberalization and growth after controling for a range of demographic, economic and financial conditions. 

the strength of the liberalization effect may be due to forces outside the control of the government, such as the diversification potential of the local equity market for world investors. 

The authors investigate whether the presence of schooling, a small government sector, the legal system [see La Porta et al. (1997, 1998)], and democratic institutions help differentiate the magnitude of the liberalization effect across countries. 

In their panel methods, the authors can accommodate heteroskedasticity both across countries and across time and correlation between country residuals by choosing the appropriate weighting matrix W . 

Samples The authorand II, their largest, include 95 and 75 countries, respectively, and employ primarily macroeconomic and demographic data.