The Dynamics of International Liberalization Process and Financial Stability: A Revisit to Regional Experiences and Some Policy Guidelines

A Revisit to Regional Experiences and Some Policy Guidelines

Abstract

This study explains some issues regarding the association between the
dynamics of deregulation of financial sector relative to financial stability and
commerce of Latin America, South East Asia and Europe for the period of
(1971-2008). More precisely, we examine the impact of evolving within an
"excrescence" of financial liberalization relative to commercial opening on
the vulnerability of a country to currency crisis and link it to the argument of
ample sequencing of liberalization reforms. The degree of correlation
between financial liberalization and exchange crisis is analysed through
dynamic panel data models using the GMM methodology. Our results
suggest nonlinearity of the effect of financial liberalization on exchange
pressures. Moreover, it is shown that the positive effect of financial
integration on the speculative pressures appear once the rate of financial
liberalization exceeds some threshold. While identifying the threshold effects
it is found that synthesized structural changes in financial liberalization
affect exchange market pressures. Our results also suggest that the impact of
financial liberalization depend on the dynamics of integration of financial
sector relative to the real sector. In fact, the "bad" dynamics of financial
liberalization lead to an increase of a country’s vulnerability to exchange
crises since the integration.