Financial liberalization and growth: new empirical evidence∗

This paper evaluates empirically the impact of capital account open-ness on growth following alternative approaches. In the Þrst part we address the relationship between economic growth and Þnancial liberaliza-tion with standard least squares and instrumental variables cross-section techniques. We also investigate non-linearities in the transmission through the Þnancial system by interacting a series of indicators of regulamenta-tion of Þnancial markets with capital account openness. In the second part we use non-parametric estimation methods to assess causality be-tween Þnancial liberalization and growth, conditional on a series of socio-economic and institutional factors. Our dataset includes observations for 77 countries over the period 1965-1995. The indicator of Þnancial liber-alization that we use is based upon the IMFs annual report on exchange arrangements and exchange restrictions. Results suggest that the impact (if any) of capital account openness on growth is negative and that the transmission through the Þnancial system may play a role in determining this sign