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Capital account liberalization and financial deepening: Does the private sector matter?

Mohamed Trabelsi and Mondher Cherif

The Quarterly Review of Economics and Finance, 2017, vol. 64, issue C, 141-151

Abstract: This paper tests, using cross-sectional and Generalized Method of Moments (GMM) dynamic panel estimation techniques, the effect of freeing cross-border financial transactions on financial sector development for a sample of 90 developed and developing countries over the period 1980–2009. it tests, specifically, if the effect of financial integration on financial deepening depends on some prerequisites in the economy. The main results of the paper are the following: First, in developing countries financial integration is not found to lead to higher financial development unless a set of prerequisites are already in place. Second, to have successful capital account liberalization in middle income countries, there is a need to develop the institutional environment and the private sector as prerequisites. Third, the effect of freeing cross-border capital flows on economic growth is found to depend on the same prerequisites in these countries.

Keywords: Financial deepening; Capital account openness; Institutions; Private sector; Economic growth (search for similar items in EconPapers)
JEL-codes: F36 F43 (search for similar items in EconPapers)
Date: 2017
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