Capital account liberalization and financial : deepening : does the private sector matter ?

Abstract EN

This study tests, using cross-sectional and Generalized Method of Moments (GMM) dynamic panel estimation techniques, the effect of freeing cross-border financial transactions on financial sector development for a sample of 90 developed and developing countries over the period 1975-2009.

The papers also tests if the effect of financial integration on financial deepening depends on some other prerequisites in the economy either for developed or developing countries.

The main results of the paper are the following: First, in developing countries financial integration is not found to lead to higher financial development unless a set of prerequisites are already in place.

Second, to have successful capital account liberalization in developing countries, there is a need to develop the institutional environment and the private sector as prerequisites.

Third, the effect of freeing cross-border capital flows on economic growth is found to depend on the same prerequisites in these countries.