The Effects of Prudential Regulation, Financial Development and Financial Openness on Economic Growth

41 Pages Posted: 7 Jan 2019

See all articles by Pierre-Richard Agenor

Pierre-Richard Agenor

University of Manchester - School of Social Sciences

Leonardo Gambacorta

Bank for International Settlements (BIS); Centre for Economic Policy Research (CEPR)

Enisse Kharroubi

Bank for International Settlements (BIS)

Luiz A. Pereira da Silva

Bank for International Settlements (BIS)

Date Written: October 1, 2018

Abstract

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

Agenor, Pierre-Richard and Gambacorta, Leonardo and Kharroubi, Enisse and Pereira da Silva, Luiz A., The Effects of Prudential Regulation, Financial Development and Financial Openness on Economic Growth (October 1, 2018). BIS Working Paper No. 752. Available at SSRN: https://ssrn.com/abstract=3302300

Pierre-Richard Agenor (Contact Author)

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

Leonardo Gambacorta

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Enisse Kharroubi

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Luiz A. Pereira da Silva

Bank for International Settlements (BIS)

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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