Short-Run Pain, Long-Run Gain: The Effects of Financial Liberalization

Abstract

Kaminsky and Schmukler examine the short- and long-run effects of financial liberalization on capital markets. To do so, they construct a new comprehensive chronology of financial liberalization in 28 developed and emerging economies since 1973. The authors also construct an algorithm to identify booms and busts in stock market prices. The results indicate that financial liberalization is followed by more pronounced boom-bust cycles in the short run. But financial liberalization leads to more stable markets in the long run. Finally, the authors analyze the sequencing of liberalization and institutional reforms to understand the contrasting short- and long-run effects of liberalization.

This paper - a product of the Investment Climate Team, Development Research Group - is part of a larger effort in the group to understand financial globalization and integration. The study was jointly funded by the Latin American Regional Studies Program and the Research Support Budget under the research project "Understanding Capital Market Crises in Emerging Economies."

JEL Classification: F30, F32, F33, F34, F36, G12, G15