Working Paper: NBER ID: w14843
Authors: Geert Bekaert; Campbell R. Harvey; Christian Lundblad
Abstract: Financial openness is often associated with higher rates of economic growth. We show that the impact of openness on factor productivity growth is more important than the effect on capital growth. This explains why the growth effects of liberalization appear to be largely permanent, not temporary. We attribute these permanent liberalization effects to the role financial openness plays in stock market and banking sector development, and to changes in the quality of institutions. We find some indirect evidence of higher investment efficiency post-liberalization. We also document threshold effects: countries that are more financially developed or have higher quality of institutions experience larger productivity growth responses. Finally, we show that the growth boost from openness outweighs the detrimental loss in growth from global or regional banking crises.
Keywords: Financial Openness; Productivity Growth; Capital Accumulation; Economic Growth
JEL Codes: F15; F30; F36; F43; G01; G15; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial Openness (F30) | Productivity Growth (O49) |
| Financial Openness (F30) | Economic Growth (O49) |
| Productivity Growth (O49) | Economic Growth (O49) |
| Financial Openness (F30) | Factor Productivity (E23) |
| Institutional Quality (L15) | Productivity Growth (O49) |
| Financial Development (O16) | Productivity Growth (O49) |
| Financial Openness and Institutional Quality (F30) | Productivity Growth (O49) |
| Financial Openness and Financial Development (F65) | Productivity Growth (O49) |
| Liberalization (F69) | Long-term Improvements in Financial Development (O16) |
| Liberalization (F69) | Long-term Improvements in Institutional Quality (O17) |
| Banking Crises (G01) | Economic Growth (O49) |
| Financial Openness (F30) | Probability of Banking Crises (G01) |