Working Paper: CEPR ID: DP6715
Authors: Andrei A. Levchenko; Romain Rancière; Mathias Thoenig
Abstract: 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 liberalization 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 estimation strategies. We implement a propensity score matching algorithm to find a control group for each liberalizing country. In addition, we exploit variation in industry characteristics 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 production 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.
Keywords: financial liberalization; growth; industry-level data; volatility; difference-in-differences estimation; propensity score matching
JEL Codes: F02; F21; F36; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial liberalization (F30) | Firm entry (L26) |
| Financial liberalization (F30) | Capital accumulation (E22) |
| Financial liberalization (F30) | Total employment (J39) |
| Growth (O00) | Net welfare impact (D69) |
| Financial liberalization (F30) | Total Factor Productivity (TFP) growth (O49) |
| Financial liberalization (F30) | Growth (O00) |
| Financial liberalization (F30) | Volatility (E32) |