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Article
Publication date: 5 October 2010

Abdullahi D. Ahmed

The purpose of this paper is to use the recent development in unit root tests and cointegration as applied to panel data and dynamic time series, to estimate the relationship…

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Abstract

Purpose

The purpose of this paper is to use the recent development in unit root tests and cointegration as applied to panel data and dynamic time series, to estimate the relationship between financial liberalization, financial development and growth.

Design/methodology/approach

The paper assesses the dynamics of the relationship between financial development, financial liberalization and growth using the latest dynamic panel data framework and time series analyses comprising up to 15 Sub‐Saharan African countries with annual observations over the period of 1976‐2005. The research uses various measures of, or proxies for, financial intermediary development, including ratio of private sector credit and share of domestic credit to income.

Findings

The results obtained from a heterogenous panel investigation and time series methodology such as Granger causality, indicate a long‐run equilibrium relationship between financial development and economic growth. This is consistent with the view that financial development can act as an “engine of growth” and plays a crucial role in the process of economic development. However, there is little evidence to support the hypothesis that financial liberalization directly “leads” growth.

Originality/value

Group mean panel fully modified ordinary least squares (FMOLS) and country‐by‐country time series investigations show evidence of causality running from financial development to growth. The analysis yielded limited evidence of financial liberalization Granger‐causing economic growth. However, this is not to say that financial liberalization does not promote growth, as it could do so indirectly through fostering financial development.

Details

Studies in Economics and Finance, vol. 27 no. 4
Type: Research Article
ISSN: 1086-7376

Keywords

Article
Publication date: 20 April 2010

Michael Enowbi‐Batuo and Mlambo Kupukile

The objective of this paper is to study the interactions between economic liberalisation, political liberalisation, and financial development in African countries. More…

Abstract

Purpose

The objective of this paper is to study the interactions between economic liberalisation, political liberalisation, and financial development in African countries. More specifically, the paper seeks to establish the impact of economic, political, and institutional openness on financial deepening.

Design/methodology/approach

In the empirical part, the paper proposes a two‐step procedure which involves the treatment effect and the new panel studies technique of recently updated data for economic and political reform.

Findings

The results show to what extent political liberalisation, economic liberalisation, and the stability of the political system have a statistically significant effect on the financial development of the continent, showing that reform, stability, and democratic rule seem to be favourable for development of the financial sector in the continent.

Originality/value

There are few studies that directly explore the link between political and economic liberalisation on financial development. The difference between this paper and other studies is that first, it is restricted to African countries, those that have been mostly undergoing the two types of reform (political and economics). The second reason is that most of the previous papers always took into consideration the effects of financial development on one of the reforms either political or economic, meanwhile in this paper, the author considers the various aspects of reform: political, economical, and the stability of the environment.

Details

Journal of Financial Economic Policy, vol. 2 no. 1
Type: Research Article
ISSN: 1757-6385

Keywords

Article
Publication date: 29 March 2021

Bosede Victoria Kudaisi, Titus Ayobami Ojeyinka and Tolulope Temilola Osinubi

International remittances are an important segment of external financial flows in Nigeria, currently superseding official development aid (ODA) in terms of volume, and foreign…

Abstract

Purpose

International remittances are an important segment of external financial flows in Nigeria, currently superseding official development aid (ODA) in terms of volume, and foreign direct investment (FDI) in terms of stability. This study is motivated by the recent increase in remittance flows in Nigeria as the highest recipient in West Africa, and the fact that the growth impact of remittances is weak within the country. The financial liberalization index developed by Chinn and Ito (2006) is employed in this study to examine the role of financial liberalization in the remittances-growth nexus in Nigeria over the period 1990–2018.

Design/methodology/approach

To address the possibility of endogeneity among the variables in the model, the study employs the generalized method of moments (GMM) as a technique of analysis.

Findings

Remittances and financial liberalization are found to have negative significant impacts on economic growth. However, the effect of the interaction term of financial liberalization and remittances on economic growth is positive and significant. This suggests that the two variables act as complements in the enhancement of economic growth in Nigeria. The study thus concludes that financial liberalization is a strong transmission channel through which remittance inflows positively affect economic growth in Nigeria. The study also advocates for a well-developed financial sector in order to attract more growth-enhancing remittances into the country.

Research limitations/implications

The implication of the research findings is that an unrestrained financial sector is necessary to encourage and optimize the benefits of remittance flows on economic growth in Nigeria.

Originality/value

Previous studies have considered the effects of financial development on the remittances-growth nexus in Nigeria. However, this study examines the role of financial liberalization in the nexus between remittances and economic growth in Nigeria by using the Chinn and Ito (2008) index of financial openness.

Details

Journal of Economic and Administrative Sciences, vol. 38 no. 4
Type: Research Article
ISSN: 1026-4116

Keywords

Article
Publication date: 2 October 2017

Rana Muhammad Adeel-Farooq, Nor Aznin Abu Bakar and Jimoh Olajide Raji

The purpose of this paper is to empirically examine the effects of financial liberalization and trade openness on the economic growth of two countries, namely, Pakistan and India…

Abstract

Purpose

The purpose of this paper is to empirically examine the effects of financial liberalization and trade openness on the economic growth of two countries, namely, Pakistan and India for the period 1985-2014.

Design/methodology/approach

This study uses the autoregressive distributed lag technique, which allows mixed order of integration. In addition, it uses the principal component method to create an index for financial liberalization to examine how it affects the economic growth of the selected countries.

Findings

The findings reveal that in the short and long run, trade openness has positive effect on the Pakistan’s economic growth while the financial liberalization has positive impact only in the long run. In the case of India, both financial liberalization and trade openness positively and significantly influence the economic growth in the short and long run.

Practical implications

By comparing the results of both countries, trade openness and financial liberalization increase the economic growth of India more than that of Pakistan. These results suggest that Pakistan should consider appropriate positive policies regarding financial liberalization and trade openness to achieve high and stable economic growth in the future.

Originality/value

This study creates financial liberalization index by using the principal component analysis method to explain the role of financial liberalization in the economic growth of Pakistan and India. In addition, it makes comparison of the results based on which country benefits most from the liberalization of trade and financial sectors. Only very few studies have examined these countries, yet their results have remained inconclusive as well.

Details

South Asian Journal of Business Studies, vol. 6 no. 3
Type: Research Article
ISSN: 2398-628X

Keywords

Open Access
Article
Publication date: 16 April 2020

Clement Moyo and Pierre Le Roux

The impact of financial reforms and financial development on an economy has received considerable attention over the recent past. This paper aims to investigate whether financial

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Abstract

Purpose

The impact of financial reforms and financial development on an economy has received considerable attention over the recent past. This paper aims to investigate whether financial liberalisation and financial development increase the likelihood financial crises in Southern African development community (SADC) countries.

Design/methodology/approach

Due to the binary nature of the dependent variable, the logit model is used for the analysis using data for the period 1990 to 2015.

Findings

The results showed that financial liberalisation captured by real interest rates reduces the likelihood of financial crises. Furthermore, regulatory quality strengthens this reductive effect of financial liberalisation on the probability of financial crises. On the other hand, financial development represented by bank credit increases the incidence of financial crises. The results also suggest that financial liberalisation may increase the likelihood of financial crises indirectly through financial development.

Research limitations/implications

The study recommends that a sound regulatory and supervisory framework be established as well as institutional quality raised to curb the effect of financial development on the incidence of financial crises.

Originality/value

There is scant evidence on the role that financial liberalisation and financial development play in the incidence of financial crises in the SADC. This study incorporates the effect of institutional quality in the analysis which has been neglected by most studies on financial reforms in SADC countries. A number of recent studies in SADC countries conclude that financial development resulting from financial reforms, may hinder economic growth. Therefore, this study sheds light on this negative relationship.

Article
Publication date: 27 June 2018

Gonçalo Pina

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…

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.

Article
Publication date: 12 January 2015

Michael Enowbi Batuo and Simplice A. Asongu

The purpose of this paper is to investigate the impact of liberalisations policies on income inequality in African countries. Examining whether the liberalisations policies have…

2106

Abstract

Purpose

The purpose of this paper is to investigate the impact of liberalisations policies on income inequality in African countries. Examining whether the liberalisations policies have affected the income distribution of everyone equally or they only assist those who are already relatively well off; leaving the poor behind. The authors also examine how they affect income distribution in the various countries within the continent, and their effect on short and long runs?

Design/methodology/approach

First, The authors used the before and after comparison, to examine the response of the level of income inequality and the volatility of income inequality from the time that financial or trade liberalisations took place in each country. Next, the authors used the panel data techniques model for a sample of 26 African countries spanning the period 1996-2010 to investigate the effect of liberalisation policies on income distribution.

Findings

The authors find that financial liberalisation has a levitated income-redistributive effect with the magnitude of the de jure measure (KAOPEN) higher than that of the de facto measure (FDI); that exports, trade and “freedom to trade” have an equality incidence on income distribution; and that institutional and/or political liberalisation has a negative impact and; economic freedom has a negative income-redistributive effect, possibly because of the weight of its legal component.

Practical implications

In general, this study provides a variegated picture, findings tend to suggest that overall the reforms have increased income inequality in African countries. It would be risky to prescribe a general policy because of the diversity of the country. However, African countries’ better performance can be attributed to a combination of policies. For example avoiding the Marco price mixture of real exchange rate appreciation and high domestic interest rates; having capital controls and prudential financial regulations which would enable them to contain the negative consequence of capital flows; putting a system in place to direct export between African countries and encouraging sub regional integration agreement. The government should put in place countervailing social policies in order to withstand social coherence and smooth the adverse transition of liberalisation policies.

Originality/value

Three main elements of originality clearly standout: first, the estimation approach used in the paper considers both short- and long-run effects of in empirical strategy; second, an exhaustive plethora of liberalisation policies (trade, financial, political and institutional are considered); and third, recent data are used to appraise second generation reforms for more updated policy implications.

Details

Journal of Economic Studies, vol. 42 no. 1
Type: Research Article
ISSN: 0144-3585

Keywords

Book part
Publication date: 16 February 2006

Lúcio Vinhas de Souza

Financial and capital liberalization can play a fundamental role in increasing growth and welfare. Typically, emerging or developing economies seek foreign savings to solve the…

Abstract

Financial and capital liberalization can play a fundamental role in increasing growth and welfare. Typically, emerging or developing economies seek foreign savings to solve the inter-temporal savings-investment problem. On the other hand, current account surplus countries seek opportunities to invest their savings. To the extent that capital flows from surplus to deficit countries are well intermediated and put to the most productive use, they increase welfare. Liberalization can, however, also be risky, as has been witnessed in many past and recent financial, currency and banking crises. It can make countries more vulnerable to exogenous shocks. In particular, if serious macroeconomic imbalances exist in a recipient country, and if the financial sector is weak, be it in terms of risk management, prudential regulation and supervision, large capital flows can easily lead to serious financial, banking or currency crises. A number of recent crises, like those in East Asia, Mexico, Russia, Brazil and Turkey (described, for example, in International Monetary Fund (IMF), 2001), and, to some extent, the Argentinean Crisis of late 2001, early 2002, have demonstrated the potential risks associated with financial and capital flows liberalization (Prasad et al., 2003).

Details

Emerging European Financial Markets: Independence and Integration Post-Enlargement
Type: Book
ISBN: 978-0-76231-264-1

Book part
Publication date: 1 January 2005

Lahcen Achy

Over the last two decades Middle East and North African (MENA) countries like much of the developing countries have experienced a wave of liberalization of their financial

Abstract

Over the last two decades Middle East and North African (MENA) countries like much of the developing countries have experienced a wave of liberalization of their financial sectors. There have been expectations that financial liberalization would enhance economic growth by stimulating savings and investment. The purpose of this chapter is three-folds: (1) to review the literature on the rationale for financial repression; (2) to examine the theoretical and empirical literature on the links between financial liberalization, savings, and investment; and (3) to assess empirically the effect of financial reforms on economic performance in the specific case of MENA countries.

Details

Money and Finance in the Middle East: Missed Oportunities or Future Prospects?
Type: Book
ISBN: 978-1-84950-347-1

Article
Publication date: 8 November 2011

Puspa Amri, Apanard P. Angkinand and Clas Wihlborg

The recurrence of banking crises throughout the 1980s and 1990s, and in the more recent 2008‐09 global financial crisis, has led to an expanding empirical literature on crisis…

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Abstract

Purpose

The recurrence of banking crises throughout the 1980s and 1990s, and in the more recent 2008‐09 global financial crisis, has led to an expanding empirical literature on crisis explanation and prediction. The purpose of this paper is to provide an analytical review of proxies for and important determinants of banking crises‐credit growth, financial liberalization, bank regulation and supervision.

Design/methodology/approach

The study surveys the banking crisis literature by comparing proxies for and measures of banking crises and policy‐related variables in the literature. Advantages and disadvantages of different proxies are discussed.

Findings

Disagreements about determinants of banking crises are in part explained by the difference in the chosen proxies used in empirical models. The usefulness of different proxies depends partly on constraints in terms of time and country coverage but also on what particular policy question is asked.

Originality/value

The study offers a comprehensive analysis of measurements of banking crises, credit growth, financial liberalization and banking regulations and concludes with an assessment of existing proxies and databases. Since, the review points to the choice of proxies that best fit specific research objectives, it should serve as a reference point for empirical researchers in the banking crisis area.

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