Short-Run Pain, Long-Run Gain

Sergio L. Schmukler · Graciela Kaminsky

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Global Financial Crisis and Policies Monetary Policy and Economic Impact Finance, Markets, and Regulation

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.

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References

1993Finance and Growth: Schumpeter Might Be Right 1996Financial Dependence and Growth 1997Postwar U.S. Business Cycles: An Empirical Investigation 1990Noise Trader Risk in Financial Markets 1999The Twin Crises: The Causes of Banking and Balance-of-Payments Problems 1999Measuring Business Cycles: Approximate Band-Pass Filters for Economic Time Series 2000Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?2000Foreign Speculators and Emerging Equity Markets

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