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6 - Financial Crises and Liberalization

Progress or Reversals?

from Part II - Macroeconomic Implications of Reforms

Published online by Cambridge University Press:  31 March 2020

By
Orkun Saka ,
Nauro F. Campos ,
Paul De Grauwe ,
Yuemei Ji  and
Angelo Martelli
Edited by
Nauro F. Campos ,
Paul De Grauwe  and
Yuemei Ji
Nauro F. Campos
Affiliation:
University College London
Paul De Grauwe
Affiliation:
London School of Economics and Political Science
Yuemei Ji
Affiliation:
University College London
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Summary

Financial crisis could play a key role in changing the policy equilibrium concerning financial markets and institutions. Using a recent comprehensive dataset on financial liberalization across ninety-four countries for the period between 1973 and 2015, we formally test the validity of this prediction for the member states of the European Union as well as a global sample. We contribute by (a) using a new up-to-date dataset of reforms and crises and (b) subjecting it to a combination of difference-in-differences and local projection estimations. In the global sample, our findings on the causal relationship between crises and liberal reforms consistently point out a negative direction between the two, suggesting that governments react to crises by intervening in financial markets. However, in a dynamic setting with impulse responses, we also illustrate that such interventions are only temporary and liberalization process restarts after a financial crisis. In the EU sample, however, we do not find sufficient evidence to support either of these observations.

Keywords

financial reformsfinancial crisesreform reversalstwin criseslocal projections
Type
Chapter
Information
Economic Growth and Structural Reforms in Europe , pp. 177 - 213
Publisher: Cambridge University Press
Print publication year: 2020

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