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  • 6 - Financial Crises and Liberalization

  • from Part II - Macroeconomic Implications of Reforms
  • Edited by Nauro F. Campos, University College London, Paul De Grauwe, London School of Economics and Political Science, Yuemei Ji, University College London
  • Book:
    Economic Growth and Structural Reforms in Europe
    Published online:
    31 March 2020
    Print publication:
    02 April 2020, pp 177-213

  • 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.