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Financial liberalization and channels of growth: a comparative study of developed and emerging economies

Archi Bhatia () and Hans Raj Sharma
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Archi Bhatia: University of Delhi
Hans Raj Sharma: Central University of Himachal Pradesh

Indian Economic Review, 2019, vol. 54, issue 1, 81-119

Abstract: Abstract This paper investigates and compares the effect of financial liberalization on economic activity of developed and emerging economies, and explores the channels of capital accumulation and total factor productivity improvements through which economic activity can be enhanced. The theoretical and empirical literature has been marred with inconclusiveness because of, inter alia, clubbing different country groups together; addressing equity liberalization inadequately; leaving banking liberalization unaddressed; scantily covering the channels of economic activity; and measuring financial liberalization inadequately. Against this background, our sample consists of nine major developed and nine major emerging economies over a period of 1971–2013. We used panel data modeling technique and estimated a two-step GMM model to overcome the issue of endogeneity. We find financial liberalization to enhance economic activity in both set of countries; capital accumulation in the emerging economies; and TFP improvements in developed economies. Banking liberalization effect in emerging economies albeit is insignificant.

Keywords: Financial liberalization; Panel data; Emerging economies; Capital accumulation; Total factor productivity (search for similar items in EconPapers)
JEL-codes: C23 C26 F15 F43 F62 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s41775-019-00038-5

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