OPENING THE FINANCIAL SECTOR TO FOREIGN COMPETITION: ASSESSING THE DYNAMIC MACROECONOMIC CONSEQUENCES USING A TWO-SECTOR GROWTH MODEL

Yuan K. Chou () and Martin S. Chin
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Yuan K. Chou: Department of Economics, University of Melbourne, VIC 3010, Australia
Martin S. Chin: Department of Economics, University of Melbourne, VIC 3010, Australia

The Singapore Economic Review (SER), 2004, vol. 49, issue 02, 195-224

Abstract: This paper uses an economic growth model with a financial sector to examine the conditions under which financial liberalization is desirable from the perspective of a policymaker who cares about the well-being of domestic households. Financial liberalization raises the rate of financial innovation and the efficiency of financial intermediation, but typically causes large foreign firms from leading-edge countries to displace smaller and less efficient domestic firms. Profits are repatriated abroad instead of accruing to domestic households as dividends. This trade-off is further complicated when we allow financial firms to hire talented foreigners once liberalization has taken place. Simulations of the model indicate that the case for financial liberalization is stronger when agents are more impatient, spillover effects of current financial innovation on future innovation are larger, financial innovations are more susceptible to congestion in their use, and when knowledge diffuses more quickly from foreign to domestic workers.

Keywords: Economic growth; finance; financial liberalization (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1142/S0217590804000883

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