Financial Openness and Productivity
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
Campbell R. Harvey
Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative
Christian T. Lundblad
University of North Carolina Kenan-Flagler Business School
AFA 2010 Atlanta Meetings Paper
Financial openness is often associated with higher rates of economic growth. We show that the impact of openness on factor productivity growth is more important than the effect on capital growth. This explains why the growth effects of liberalization appear to be largely permanent, not temporary. We attribute these permanent liberalization effects to the role financial openness plays in stock market and banking sector development, and to changes in the quality of institutions. We find some indirect evidence of higher investment efficiency post-liberalization. We also document threshold effects: countries that are more financially developed or have higher quality of institutions experience larger productivity growth responses. Finally, we show that the growth boost from openness outweighs the detrimental loss in growth from global or regional banking crises.
Number of Pages in PDF File: 32
Keywords: financial openness, growth, liberalization, productivity
JEL Classification: F30, G15, O16, O47
Date posted: March 13, 2009 ; Last revised: September 19, 2012
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