OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

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Can Reforms Promoting Growth Increase Financial Fragility?

An Empirical Assessment

Certain growth-promoting policies can have negative side-effects by increasing the vulnerability of economies to financial crises. Typical examples are greater openness to financial flows or more liberalised financial markets. This paper investigates whether the growth benefits of policy reforms in these growth-enhancing areas, and others such as trade openness, exceed the possible costs of occasional, albeit potentially severe, crises for a sample of 100 developed and emerging economies from 1970 to 2010. The results suggest that the pro-growth effects of greater capital account openness outweigh the negative effects of a higher propensity to twin crises. Greater domestic financial liberalisation is associated with faster growth, but also with a higher propensity to systemic banking and twin crises. A free floating exchange rate and greater openness to trade, by reducing the likelihood of currency crises, are associated with higher growth. While pro-competitive product market regulations and lower corporate taxes are associated with higher growth, they do not seem to influence financial fragility via higher probability of crises.


Keywords: financial crisis, financial stability, growth, financial liberalisation
JEL: F43: International Economics / Macroeconomic Aspects of International Trade and Finance / Economic Growth of Open Economies; F3: International Economics / International Finance; F32: International Economics / International Finance / Current Account Adjustment; Short-Term Capital Movements; E32: Macroeconomics and Monetary Economics / Prices, Business Fluctuations, and Cycles / Business Fluctuations; Cycles; F36: International Economics / International Finance / Financial Aspects of Economic Integration; F33: International Economics / International Finance / International Monetary Arrangements and Institutions; E44: Macroeconomics and Monetary Economics / Money and Interest Rates / Financial Markets and the Macroeconomy
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