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Financial Openness and Productivity

Geert Bekaert (), Campbell Harvey () and Christian Lundblad

No 14843, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F15 F30 F36 F43 G01 G15 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-eff
Date: 2009-04
Note: AP IFM
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Published as Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2011. "Financial Openness and Productivity," World Development, Elsevier, vol. 39(1), pages 1-19, January.

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