Growth and risk at the industry level: The real effects of financial liberalization

This paper analyzes the effects of financial liberalization on growth and volatility at the industry level in a large sample of countries. We estimate the impact of liberal-ization on production, employment, firm entry, capital accumulation, and productivity, using both de facto and de jure measures of liberalization. In order to overcome omitted variables concerns, we employ a number of alternative difference-in-differences estima-tion strategies. We implement a propensity score matching algorithm to find a control group for each liberalizing country. In addition, we exploit variation in industry char-acteristics to obtain an alternative set of difference-in-differences estimates. Financial liberalization is found to have a positive effect on both growth and volatility of produc-tion across industries. The positive growth effect comes from increased entry of firms, higher capital accumulation, and an expansion in total employment. By contrast, we do not detect any effect of financial liberalization on measured productivity. Finally, the growth effects of liberalization appear temporary rather than permanent