The Effects of Prudential Regulation, Financial Development and Financial Openness on Economic Growth
41 Pages Posted: 7 Jan 2019
Date Written: October 1, 2018
This paper studies the effects of prudential regulation, financial development, and financial openness on economic growth. Using both existing models and a new OLG framework with banking and prudential regulation in the form of capital requirements, the first part presents an analytical review of the various channels through which prudential regulation can affect growth. The second part provides a reduced-form empirical analysis, based on panel regressions for a sample of 64 advanced and developing economies. The results show that growth may be promoted by prudential policies whose goal is to mitigate financial risks to the economy. At the same time, financial openness tends to reduce the growth benefits of these policies, possibly because of either greater opportunities to borrow abroad or increased scope for cross-border leakages in regulation.
Keywords: economic growth, prudential regulation, financial development, financial openness
JEL Classification: E44, G28, O41
Suggested Citation: Suggested Citation