Financial Liberalization and Financial Fragility

Author/Editor:

Enrica Detragiache ; Asli Demirgüç-Kunt

Publication Date:

June 1, 1998

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

A study of 53 countries during 1980-95 finds that financial liberalization increases the probability of a banking crisis, but less so where the institutional environment is strong. In particular, respect for the rule of law, a low level of corruption, and good contract enforcement are relevant institutional characteristics. The data also show that, after liberalization, financially repressed countries tend to have improved financial development even if they experience a banking crisis. This is not true for financially restrained countries. This paper’s results support a cautious approach to financial liberalization where institutions are weak, even if macroeconomic stabilization has been achieved.

Series:

Working Paper No. 98/83

English

Publication Date:

June 1, 1998

ISBN/ISSN:

9781451850512/1018-5941

Stock No:

WPIEA0831998

Format:

Paper

Pages:

36

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