The S-Curve: Understanding the Dynamics of Worldwide Financial Liberalization

Nan Li, Chris Papageorgiou, Tong Xu, and Tao Zha
Working Paper 2021-19
July 2021

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Abstract: Using a novel database of domestic financial reforms in 90 countries from 1973 to 2014, we document that global financial liberalization followed an S-curve path: reforms were slow and gradual in early periods, accelerated during the 1990s, and slowed down after 2000. We estimate a learning model that explains these dynamics. Policymakers updated their beliefs about the growth effects of financial reforms by learning from their own and other countries' experiences. Positive growth surprises in advanced economies helped accelerate belief updating worldwide, leading to the global wave of financial liberalization in the 1990s. The 2008 financial crisis, however, caused significant belief reversals.

JEL classification: O11, O50, C11, C54

Key words: financial reforms, informational diffusion, cross-country learning, belief updating, S-curve evolution, political costs, economic growth, financial crisis

https://doi.org/10.29338/wp2021-19


The authors wish to thank Paco Buera, Romain Duval, Gita Gopinath, Peter Henry, Giorgio Primiceri, Raghu Rajan, and Dennis Quinn for helpful discussions and comments. They also thank Zidong An, Huancheng Du, and Shihui Liu for outstanding research assistance. This paper is part of a research project on macroeconomic policy in low-income countries supported by the U.K.'s Foreign, Commonwealth and Development Office. The views expressed herein are those of the authors and not those of the Federal Reserve Bank of Atlanta, the Federal Reserve System, the International Monetary Fund, its executive board, or its management.

Please address questions regarding content to Nan Li, International Monetary Fund, 700 19th Street NW, Washington, DC 20431; Chris Papageorgiou, International Monetary Fund, 700 19th Street NW, Washington, DC 20431; Tong Xu, Southwestern University of Finance and Economics, 555 Liutai Avenue, Wenjiang District, Chengdu, Sichuan, China 611130; or Tao Zha, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470 and Emory University and also NBER.

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