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

Kaminsky, Graciela; Schmukler, Sergio L.

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

IMF Working Paper No. 03/34

60 Pages Posted: 29 Jan 2006

See all articles by Graciela Kaminsky

Graciela Kaminsky

George Washington University - Department of Economics; National Bureau of Economic Research (NBER)

Sergio L. Schmukler

World Bank - Development Research Group (DECRG)

There are 3 versions of this paper

Date Written: February 2003

Abstract

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

Keywords: financial liberalization, capital controls, financial integration, stock market prices, booms, busts, financial cycles

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

Suggested Citation: Suggested Citation

Kaminsky, Graciela and Schmukler, Sergio, Short-Run Pain, Long-Run Gain: The Effects of Financial Liberalization (February 2003). IMF Working Paper No. 03/34, Available at SSRN: https://ssrn.com/abstract=879109