Financial Liberalization and Economic Growth in the Latin American Region

Abstract

The impact of financial liberalization on economic growth is still ambiguous. Using a panel of 22 Latin American countries (LATAM) over the period 1980 to 2018, we conduct a short-term and long-term analysis of this impact. The study provides five novels de facto indexes for capital account openness which are applied into a financial endogenous growth model. An error correction model (ECM) analysis provides an examination of this relationship. The results show the presence of a long-run positive link between economic growth and financial liberalization. Among the indexes of liberalization, the interest rate and investment are the most relevant to confirm this linkage. In the short-term, domestic and external liberalization are harmful to economic growth. The findings of the study are very sensitive to the financial openness proxy used.