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Financial Development and Economic Growth: The Role of Financial Liberalization

Zeeshan Atiq and M. Emranul Haque

Centre for Growth and Business Cycle Research Discussion Paper Series from Economics, The University of Manchester

Abstract: This paper argues that excessive liberalisation causes financial development to lose its effectiveness in generating economic growth. We investigate the hypothesis through a dynamic panel analysis for 88 countries for the period of 1973 - 2005 using a comprehensive financial development indicator constructed through principal component analysis of five different indicators used in the literature. For financial liberalisation, we use an aggregate index and its seven disaggregated components. The results indicate that the positive effect of financial development on long-run growth continues to decline as the financial sector becomes more liberalised. Our results are robust to changes in the financial development indicators and the disaggregation of the financial liberalisation index.

Pages: 38 pages
Date: 2015
New Economics Papers: this item is included in nep-gro and nep-pke
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