We show that equity market liberalizations, on average, lead to a one percent increase in annual real economic growth over a five-year period. The effect is robust to alternative definitions of liberalization and does not reflect a business cycle effect. The channel of growth is both increased investment post liberalization which partially reflects a decreased cost of capital and increased factor productivity. The additional investment is largely financed by foreign capital leading to deteriorating trade balances. Some of the liberalization effect can be accounted for by coincidental macroeconomic reforms as well as financial development. However, our analysis shows that even after controlling for a broad range of variables, a statistically significant and economically important role is played by equity market liberalization. We appreciate the helpful comments of Wayne Ferson, Peter Henry, Ross Levine, Graciela Kaminsky,

This paper provides a micro-level evidence that financial development impacts growth by reducing financing constraints that would otherwise restrict efficient firm investment. I estimate a structural model based on the Euler equation for investment using firm-level data from 40 countries. I find a strong negative relationship between the extent of financial market development, and the sensitivity of investment to availability of internal funds (a proxy for financing constraints). I also consider size effect, business cycles and legal environment as plausible alternative explanations and find the results to be robust in all cases.

this paper can be found at http://www.duke.edu/charvey/Research/indexr.htm 1.

If there are benefits to international risk sharing, we would expect that consumption growth variability would decrease following the liberalization of the equity market and that markets with open equity markets would display lower consumption growth variability than closed markets, everything else equal. However, the recent literature on financial liberalization suggests that volatile capital flows lead to increased output and consumption growth variability post liberalization. In this article, we examine the effects of equity market liberalization on GDP and consumption growth variability. Excluding the 1997-2000 years, dominated by the consequences of the South-East Asia crisis, we find an economically and statistically significant decrease in both GDP and consumption growth variability post liberalization. When the 1997-2000 years are taken into account, the negative volatility response of consumption growth is weakened and is no longer significant for a sample of emerging markets, but remains significant for a larger set of countries.

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Recent empirical work has shown that financial development is important for economic growth, since financial markets more effectively allocate capital to firms with high value projects. This raises the question of whether firms with high return projects in countries with poorly developed financial institutions are able to take actions to mitigate the effects of deficient (formal) financial intermediaries. Recent work suggests that implicit borrowing in the form of trade credit may provide one such source of funds. In this paper, utilizing the methodology of Rajan and Zingales (1998), we show that industries with higher dependence on trade credit financing (measured by the ratio of accounts payable to total assets) exhibit higher rates of growth in countries with relatively weak financial institutions. Furthermore, consistent with the notion that trade credit may not be used by young firms, we show that most of the effect that we report comes from growth in pre-existing firms, rather than an increase in the number of firms.

Abstract: We develop a methodology that intuitively characterizes the choices countries have made with respect to the trilemma during the post Bretton-Woods period. The paper first outlines the new metrics for measuring the degree of exchange rate flexibility, monetary independence, and capital account openness while taking into account the recent development of substantial international reserve accumulation. The evolution of our “trilemma indexes” illustrates that, after the early 1990s, industrialized countries accelerated financial openness, but reduced the extent of monetary independence while sharply increasing exchange rate stability, all reflecting the introduction of the euro. In contrast, emerging market countries pursued exchange rate stability as their key priority up to the late 1980s while non-emerging market developing countries has pursued it throughout the period since 1970. As a stark difference from the latter group of countries, emerging market countries have converged towards intermediate levels of all three indexes, characterizing managed flexibility while retaining some degree of monetary autonomy and accelerating financial openness. This recent trend appears to be sustained by using sizable international reserves as a buffer. We also confirm that the weighted sum of the three indexes adds up to a constant, validating the notion that a rise in one trilemma variable should be traded-off with a drop of the weighted sum of the other two. The second part of the paper deals with normative aspects of the trilemma, relating the policy choices to macroeconomic outcomes such as the volatility of output growth and inflation, and medium term inflation rates. Some key findings for

What is the impact of firms that cross-list, issue depositary receipts, or raise capital in international stock markets on the liquidity of remaining firms in domestic markets? Using a panel of over 3,200 firms from 55 countries during 1989-2000, we find that internationalization reduces the liquidity of domestic firms through two channels. First, the trading of international firms migrates from domestic to international markets and the reduction in domestic liquidity of international firms has negative spillover effects on domestic firm liquidity. Second, there is trade diversion within domestic markets as liquidity shifts out of domestic firms and into international firms.

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The usual caveat applies. The Growth of Global Equity Markets: A Closer Look This paper presents both the time-series and cross-country evidence on the growth of global equity markets and attempts to shed some light on the sources of equity market growth. I show that for developed countries market size is positively related to correlation of stock markets with the global portfolio, and that it is negatively related to government consumption. For emerging market countries, financial intermediaries and trade openness are found to be conducive to the development of local equity markets. Ceteris paribus, developed countries with greater economic freedom and stronger shareholder protections are associated with more highly valued equity markets, while French and German civil law countries and countries with insider trading legislation tend to have