Macro and micro financial liberalizations, savings and growth

Abstract

Purpose

This paper aims to empirically and theoretically study the role of domestic savings behind the financial stability and growth effects of different financial liberalizations, when the government is not able to commit to enforce financial contracts. The following liberalizations are considered. Macro financial liberalizations target capital flow and interest rate liberalization, whereas micro financial liberalizations target competition in the financial sector. Simultaneous liberalizations target both micro and macro dimensions.

Design/methodology/approach

This study theoretically solves a new simple model of different types of financial liberalizations, micro, macro and simultaneous. The focus is on the crisis and growth effects of countries liberalizing only macro dimensions of financial policy, relative to both micro and macro dimensions together, and on how the level of savings determines these effects. The study empirically uses data on macro and micro financial liberalizations for 91 countries between 1973 and 2005 to provide a taxonomy of liberalization strategies, and empirically tests whether domestic savings are related to the success of different strategies. Capital accumulation, investment profile and the frequency of financial crises are also evaluated.

Findings

The findings show that, empirically, simultaneous liberalizations are associated with larger growth only if the savings rate is large. If the savings rate is low, growth is larger when liberalizations target macro dimensions. Capital accumulation increases more with macro liberalizations under low savings and simultaneous liberalizations with high savings. Simultaneous liberalizations with low savings increase risks related to contract viability and expropriation, profits repatriation and payment delays. Simultaneous liberalizations with high savings are associated with smaller probabilities of financial crises. These observations are consistent with the theoretical model, where reduced competition in the financial sector can improve financial stability and reduce financial crises when savings are low.

Originality/value

The contribution of this paper, relative to the vast literature on financial liberalizations, is to document how savings determine the crisis and growth effects of macro and micro liberalizations. It provides and tests empirically a new channel for the role of savings when governments cannot commit to enforce financial contracts. This is informative for policymakers and policy institutions facing different strategies of financial liberalizations.

Citation

Pina, G. (2018), "Macro and micro financial liberalizations, savings and growth", Journal of Financial Economic Policy, Vol. 10 No. 2, pp. 290-309. https://doi.org/10.1108/JFEP-09-2017-0080