Essays on financial liberalization

This thesis investigates the effect of financial liberalization on economic growth, income inequality and financial instability. Chapter 1 describes aim and scope of the thesis. Chapter 2 provides a meta-analysis of the literature on financial liberalization and economic growth. It is found that financial liberalization has a positive, albeit weak effect on growth. Chapter 3 presents a theoretical model to study the relationship between financial liberalization and income inequality. The model suggests that financial liberalization tends to reduce income inequality if financial depth is either large, or improves with financial liberalization. Chapter 4 applies dynamic panel data methods to empirically assess the findings of chapter 3, using new income inequality data. Chapter 5 develops a model in which financial liberalization affects financial instability via reduced borrowing cost and entry of risky entrepreneurs. Theoretically, the overall effect of financial liberalization on instability is ambiguous. Therefore, a panel data analysis using new data on the impaired loans ratio provides further insights. The results indicate that banks in more financially liberalized countries are less stable during a crisis period, but outside the crisis period. Chapter 6 concludes on the findings of this thesis. Overall, financial liberalization appears to be a mixed blessing for developing countries: it probably promotes economic growth at the expense of income equality. In the case of developed countries, financial liberalization probably will not enhance growth, but it might lead to a more equal distribution of income. Also, one should realize that financial liberalization may render the financial system more unstable