The Effect of Financial Liberalization on the Economic Development Process in case of Inefficient Banking

MPRA Paper from University Library of Munich, Germany

Abstract: In this essay we develop a stylized model to investigate the role of external financial liberalization in the development process of a small economy. Firstly, we show that there exists an economic development threshold under which the capital account liberalization can not occur. Secondly, we show that in the presence of banking inefficiency, the financial liberalization presents a major risk for the economic development process. Indeed, if the economy is situated in a vulnerability region every bad performance of the investment sector could degenerate in a banking crisis delaying the development process by several periods relatively to the situation of closed economy. Finally, it is also shown that reducing the credit market imperfection decreases the likelihood of a banking crisis.

Keywords: Banking efficiency; capital account liberalization; confidence crisis; economic development (search for similar items in EconPapers)
JEL-codes: F34 G15 O16 (search for similar items in EconPapers)
Date: 2002-09
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Citations: View citations in EconPapers (1)

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