Financial Liberalization Essay

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Impacts of Financial Liberalisation on Economic Growth in SADC Chapter Two (2) 2. Literature review Defining Financial Liberalisation: Financial liberalization is a process whereby restrictions on financial markets and financial institutions are eliminated which involves the removal of controls by the government namely, credit and interest rate controls. In the early 1970’s, the research on financial liberalization was initiated by McKinnon and Shaw (1973) who argued that state control of credit, interest rate and other financial variables was responsible for the retarding economic growth in the world economy (Abiad, Detragiache & Tressel, 2008). McKinnon and Shaw (1973) emphasized that allowing market forces to determine economic variables …show more content…

The study gathered time series and annual data for the period covering 1987 to 2009. The methodology comprises econometric techniques such as; Augmented Dickey-Fuller (ADF) Unit Root test, Ordinary Least Square (OLS) method, Error Correction Mechanism (ECM) and Johansen Co-integration test. The key findings emerging from this study indicates that financial liberalization in Nigeria has been significant on her economic growth. Hence, it justifies the assertion of Mckinnon (1973) and Shaw (1973) on financial liberalization. The study also concludes that financial liberalization has not refrained investors from seeking funds from banks at the deregulated lending rate. Instead, the lending rate allowed for the effective and efficient intermediation of funds to the users of funds to participate in productive activities that add to economic growth. Exchange rate determination by international market forces of demand and supply has not been detrimental to the economy of Nigeria but rather it has been significant to boost economic growth. The macroeconomic instability resulted from financial liberalization does not have a negative influence on the overall output of the economy. So, it can be observed that macroeconomic instability cannot be attributed to financial liberalization. Even if financial development is significant for economic growth, financial liberalization has not really increased the depth of the financial system which would consequentially impact on the economy positively. The degree of openness is an important aspect of globalization which indicates that the trade relation of Nigeria with the rest of the world has contributed significantly towards economic

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