The interest group theory of financial development: Evidence from regulation

We use a new dataset of de jure measures of trade, capital account, product market, and domestic financial regulation for 91 countries from 1973 to 2005 to test Rajan and Zingales’s (2003) interest group theory of financial development. In line with the theory, we find strong evidence that trade liberalization is a leading indicator of domestic financial liberalization. This result is robust to the use of different data frequencies (annual, 5-year intervals), estimation methods (OLS, 2SLS, system GMM) and a check for non-linear effects. However, in contrast to the theory, we do not find consistent evidence of an effect of capital account liberalization.     

De facto exchange rate regimes and currency crises: Are pegged regimes with capital account liberalization really more prone to speculative attacks?

This paper empirically examines whether de facto exchange rate regimes affect the occurrence of currency crises in 84 countries over the 1980–2001 period by using the probit model. We employ the de facto classification of Reinhart and Rogoff (2004) that allows us to estimate the impact of relatively long-lived exchange rate regimes on currency crises with much greater precision. We find that pegged regimes significantly decrease the likelihood of currency crises compared with floating regimes. By using the combined data of exchange rate regimes and the existence of capital controls, we also find interesting evidence that pegged regimes with capital account liberalization significantly lower the likelihood of currency crises compared with other regimes. These results are robust to a wide variety of samples and models. From the standpoint of the macroeconomic policy trilemma, we can conjecture that pegged regimes with capital account liberalization are substantially less prone to speculative attacks because they can enhance greater credibility in their currencies by abandoning monetary policy autonomy.     

Financial development and the instability of open economies

This paper introduces a framework for analyzing the role of financial factors as a source of instability in small open economies. Our basic model is a dynamic open economy model with a tradeable good produced with capital and a country-specific factor. We also assume that firms face credit constraints, with the constraint being tighter at a lower level of financial development. A basic implication of this model is that economies at an intermediate level of financial development are more unstable than either very developed or very underdeveloped economies. This is true both in the sense that temporary shocks have large and persistent effects and also in the sense that these economies can exhibit cycles. Thus, countries that are going through a phase of financial development may become more unstable in the short run. Similarly, full capital account liberalization may destabilize the economy in economies at an intermediate level of financial development: phases of growth with capital inflows are followed by collapse with capital outflows. On the other hand, foreign direct investment does not destabilize.     

Financial liberalization,insurance market,and the likelihood of financial crises

This paper provides empirical evidence to investigate the direct impact of financial liberalization on the likelihood of currency/systemic banking crises, and examines the roles of insurance market, country risk, and economic conditional variables on the relationship between financial liberalization and financial crises in 39 countries. Our empirical results support that financial liberalization does have a significantly negative impact on the likelihood of currency/systemic banking crises, and that the indirect effects of insurance development and lower country risk decrease the probability of crises, but the indirect effect of economic conditional proxies is enhanced with the likelihood of a financial crisis. The policy implication is that the government or authority should strengthen the positive role of the insurance sector in order to combat financial crises.     

基于金融发展水平的证券市场开放对经济增长的影响

本文在索洛—斯旺框架下构建了一个分析证券市场开放对经济增长影响的理论模型,模型显示:金融开放后的经济收敛速度要大于封闭时的经济收敛速度,金融发展水平会促进金融开放带来的经济增长效应。通过金砖国家的数据对理论模型的结论进行实证检验显示:用名义的AREAER指标、实际的EW指标和资本流动指标度量的证券市场开放度的系数均显著为正,说明证券市场开放有利于经济增长;证券市场发展水平会促进该经济增长效应,而银行业发展水平对该经济增长效应的影响不显著。     

Ready for capital account convertibility?

This paper investigates whether the impact of capital account convertibility on the long term volatility of economic growth depends on financial development. It estimates a system of three simultaneous equations: mean growth, volatility of growth and financial development. This allows for the study of both, the impact of capital account liberalization on volatility, as well as its direct impact on financial development. Results indicate that economies with low financial development fall prey to excess volatility arising from capital account openness, while capital account openness itself has a significant positive impact on financial development. The results are robust to alternative measures of financial development and volatility and to the removal of outliers.     

资本账户开放对企业投资效率的影响研究

依据2001—2017年95个国家的上市企业数据,考量资本账户开放对企业投资效率的作用。结果显示：资本账户开放能提高企业投资效率,缓解投资不足,抑制过度投资;机制检验表明,资本账户开放通过提高市场竞争、缓解融资约束以及提高风险承担水平三个渠道提高企业投资效率。异质性检验显示,流入方向的资本账户开放对企业投资效率的提升更大,资本账户开放主要提高了金融市场发展程度高的国家、外部融资依赖度高的行业以及高杠杆率企业的投资效率。鉴于此,建议有序开放资本账户,加快金融市场建设,积极融入全球资本市场发展。     

Interest rate liberalization and capital adequacy in models of financial crises

We characterize the effects of interest rate liberalization on OECD banking crises, controlling for the standard macro prudential variables that prevail in the current literature. We use the Fraser Institute’s Economic Freedom of the World database. We test for the direct impacts of interest rate liberalization on crisis probabilities and their indirect effects via capital adequacy. Over the period 1980–2012, we find that interest rate liberalization has a crises reducing effect, and it appears that the beneficial effects work by strengthening capital buffers. We also show that when controlling for liberalization, capital adequacy and liquidity, the main driver of financial crises is property price growth. Our results are invariant when we control for alternative sensitivity tests for robustness purposes.     

Capital Account Openness,International Trade,and Economic Growth: A Cross-Country Empirical Investigation

New empirical estimates of the effects of capital restrictions on growth support capital account liberalization, especially for developed countries. Capital restrictions reduce the benefits of foreign direct investment (FDI) on growth in developing countries. Estimation results for long-term capital flows demonstrate that countries with higher flows grow faster, challenging the belief that countries must attain a threshold level of development or human capital to benefit from capital inflows. Moreover, findings show that trade with developed countries and FDI inflows are substitutes in developing countries. Overall, the results support capital account liberalization in developed and developing countries.     

Quantifying the effects of capital controls in small states

Capital account liberalization can potentially have important effects on the economy. Numerous techniques have been employed in the literature to quantify these restrictions. These include ex-post macroeconomic indicators, regression-based indices and qualitative indices of capital control legislation. This paper evaluates the effect of the removal of capital account controls on small island developing states. In order to evaluate the robustness of the relationship between capital account liberalization and growth, the study uses a bootstrap approach to index construction. This approach allows one to assess the potential effects of differences in index specification as well as explain inconsistencies reported in the published literature. The results reported in the study suggest that the relationship between capital account liberalization and growth is fragile but positive. These results imply that the countries should approach capital account liberalization with caution, as simply removing restrictions does not guarantee growth.     

法国资本账户开放的政策经验与启示

自20世纪80年代初开始,随着国际收支改善、金融部门发展以及金融自由化步伐加快,法国采取渐进式步骤,平稳实现了资本账户开放。文章介绍了法国实施资本账户开放的主要路径以及政策效果和影响,并总结了其对于我国资本账户开放的启示：如在资本账户开放前,应增强本国的实体经济、完善金融体系;资本账户改革需与整体经济改革协调一致;针对不同类别的资本流动风险采取不同防范措施等。     

Trade in Financial Services and Capital Movements

International financial liberalization may alter saving–investment imbalances and patterns of capital flows across countries. Using a panel of OECD countries for 1990–1996, I examine how the liberalization of capital movements and financial services trade affects net private capital flows. Capital inflows tend to fall (rise) with the liberalization of commercial presence in banking and securities (insurance) services, possibly reflecting an increase (decrease) in saving. I find that capital account liberalization stimulates capital inflows, suggesting that better access to external financing helps sustain larger current account deficits. When cross-border trade is liberalized, capital inflows change insignificantly.     

Exchange rate regimes,capital controls,and currency crises: Does the bipolar view hold?

This paper empirically examines the link between de facto exchange rate regimes and the incidence of currency crises in 84 countries from 1980 to 2001 using probit models. We employ the de facto classification of Reinhart and Rogoff (2004) that allows us to estimate the impact of relatively long-lived exchange rate regimes on currency crises with much greater precision. We find no evidence that, as the bipolar view argues, intermediate regimes have a significantly higher probability of currency crises than both hard pegs and free floats. Using the combined data of exchange rate regimes and the existence of capital controls, we also find that hard pegs with capital account liberalization have a significantly lower probability of currency crises than intermediate regimes with capital controls and free floats with capital controls. Hence, the bipolar view does not strictly hold in the sense that intermediate regimes are significantly more prone to currency crises than the two extreme regimes. However, the fact that hard pegs with capital account liberalization are substantially less prone to currency crises is worthy of note.     

Decomposing the effects of financial liberalization: Crises vs. growth

We present a new empirical decomposition of the effects of financial liberalization on economic growth and on the incidence of crises. Our empirical estimates show that the direct effect of financial liberalization on growth by far outweighs the indirect effect via a higher propensity to crisis. We also discuss several models of financial liberalization and growth whose predictions are consistent with our empirical findings.     

Multiple equilibria in the dynamics of financial globalization: The role of institutions

Recent research underscores the dual role played by institutions for deciphering the financial globalization – growth nexus. On the one hand, for capital account liberalization to be growth enhancing, a critical level of local institutional quality is needed. On the other hand, increased integration in the global financial system strengthens these countries’ institutions. We argue that this complex relationship may give rise to multiple equilibria in the dynamics of financial global integration: haphazard capital account liberalization may lead to situations where well integrated nations become increasingly better integrated, while poorly integrated nations are left at the margin. To test this hypothesis, we check whether controlling for the quality of institutions eliminates conditional convergence of global financial integration. Our results confirm that growth in financial integration is non-linear, and that this non-linearity disappears once we control for the quality of institutions.     

Capital Account Liberalization and Aggregate Productivity: The Role of Firm Capital Allocation

We study the effects of capital account liberalization on firm capital allocation and aggregate productivity in 10 Eastern European countries. Using a large firm‐level data set, we show that capital account liberalization decreases the dispersion in the return to capital across firms, particularly in sectors more dependent on external finance. We provide evidence that capital account liberalization improves capital allocation by allowing financially constrained firms to demand more capital and produce at a more efficient level. Finally, using a model of misallocation we document that capital account liberalization increases aggregate productivity through more efficient capital allocation by 10% to 16%.     

制度质量与资本账户开放:基于中国的实证检验

本文运用最小二乘回归方法,对我国1976—2007年间的资本账户开放与制度质量以及金融发展等变量之间的关系进行了实证检验。结果显示,制度质量对资本账户开放的直接影响,以及通过作用于金融发展和金融脆弱性而产生的间接影响在我国是存在的。并且,无论是制度合成指标,还是制度分指标,对资本账户开放的直接效应都为负,间接效应都为正。此外,金融发展与资本账户开放之间显著负相关,表明金融发展水平不足、制度质量不高,是现阶段抑制我国资本账户开放的重要因素。因此,从提高资本账户开放的经济效应的角度,应强调相关制度的重要性。     

The impact of capital account liberalization measures

In this paper we analyze whether capital account liberalization leads to higher asset prices. Based on a sample of 242 non-financial firms listed on the Stock Exchange of Thailand at the time of the announcement of the relaxation of capital control in Thailand on January 29, 2007, we find positive and significant abnormal returns on Day −2, Day 1, and Day 3 relative to the announcement day. Our findings suggest that capital account liberalization favorably affects stock prices of firms, though the effect varies across industries. From a public policy perspective, our results suggest that liberalizing capital account by relaxing capital control measures could improve firm value in the short-term, which may, in turn, boost the level of economic growth in the long run. In addition, the results show that there is a significant fall in the mean beta in the post-liberalization period, thereby implying the lower cost of capital.     

The Aggregate and Distributional Effects of Financial Globalization: Evidence from Macro and Sectoral Data

We take a fresh look at the aggregate and distributional effects of policies to liberalize international capital flows—financial globalization. Both country‐ and industry‐level results suggest that such policies have led on average to limited output gains while contributing to significant increases in inequality. The country‐level results are based on 228 capital account liberalization episodes spanning 149 advanced and developing economies from 1970 to the present. Difference‐in‐difference estimation using industry‐level data for 23 advanced economies suggests that liberalization episodes reduce the share of labor income, particularly for industries with higher external financial dependence, higher natural propensity to use layoffs to adjust to idiosyncratic shocks, and higher elasticity of substitution between capital and labor.     

What is the net effect of financial liberalization on bank productivity? A decomposition analysis of bank total factor productivity growth

We employ a unique framework to quantify the net effect of financial liberalization on banks’ total factor productivity (TFP) growth through a decomposition analysis of two effects: a positive direct effect of financial liberalization on bank TFP growth; and a negative indirect effect operating through a higher propensity to systemic banking crisis. The empirical decomposition is based on a sample of 1530 banks operating in 88 countries over the period 1999–2011. We find that the net effect of financial liberalization on bank TFP growth is positive: the direct positive effect outweighs the negative one. An important policy implication flows from these findings.