Taylor, Ashley
(2011)
The macroeconomic impact of financial reforms: interactions and spillover.
PhD thesis, London School of Economics and Political Science.
Abstract
How do financial reforms affect the allocation of production within an economy
and its long-run macroeconomic performance? How does the impact of financial
reforms interact with the effects of other policy reforms or the influence of an economy’s structural characteristics? These are the central themes of this thesis.
Chapter 2 examines how financial and trade reforms interact in determining
the allocation of production within a general equilibrium heterogeneous firm trade
model. While the two reforms have complementary effects on average productivity, the marginal benefits of trade liberalization for wages and household utility are
reduced if much reallocative work has been done through a well-functioning financial sector. Financial reforms can spill over internationally via trade channels and
greater usage of exports as collateral can enhance the benefits of trade reforms.
Chapter 3 analyzes how domestic and international financial reforms shift production across firms and sectors. Using a modified macro credit multiplier model,
changes in credit constraints prompt reallocations in production as firms respond to
adjustments in sectoral relative prices and interest rates. Financial reforms generally
lead to higher relative investment by more productive firms and to increased aggregate productivity. Intra-sectoral reallocations smooth out the steady state comparative static effects of financial reforms. Structural features of an economy condition
the impact of financial reforms. Similarly, the impact of capital account liberalization depends upon the state of domestic financial reforms.
Recent work has highlighted the potential for “threshold” levels of domestic
3institutional development above which the potential growth benefits of financial
openness offset the associated risks. Chapter 4 provides a wide-ranging empirical analysis of potential threshold conditions using parametric and semi-parametric
methods. It finds that there are clearly identifiable thresholds in variables such as
financial depth and institutional quality and that the thresholds are lower for foreign direct investment and portfolio equity liabilities compared to those for debt
liabilities.
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