Using a 2-Sector Growth Model to Assess the Macroeconomic Consequences of Financial Liberalization

Yuan K. Chou and Martin S. Chin

No 835, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: This paper uses the economic growth model with a financial sector developed in Chou and Chin (2001) to examine the conditions under which financial liberalization is desirable from the perspective of a policymaker who is concerned about the well-being of domestic households. Financial liberalization raises the rate of financial innovations 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.

Keywords: Economic Growth; Finance; Financial Liberalization (search for similar items in EconPapers)
JEL-codes: G20 G21 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2002
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