Abstract

This independent study examines how financial liberalization is associated with economic growth in emerging markets, focusing on three linked policy channels: interest-rate liberalization, stock-market development, and exchange-rate regime choice. In the theory chapter, these channels matter because they affect borrowing costs, how savings move into investment, and how economies adjust when external conditions change. I build a dynamic panel for emerging markets using macro and financial indicators from the World Development Indicators and de facto exchange-rate regime classifications from Ilzetzki, Reinhart, and Rogoff. The macro-financial data cover 1974–2024, while the exchange-rate regime data cover 1974–2016. The empirical strategy starts with pooled OLS and fixed-effects models with year controls and country-clustered standard errors, then extends to dynamic panel methods using internal instruments in System GMM to deal with persistence and simultaneity between growth and financial variables. The main fixed-effects results show that growth is negatively associated with the real interest-rate spread, which I use as a measure of intermediation frictions, and positively associated with stock-market liquidity measures that separate trading activity from market size, while private credit is less consistent across specifications. The estimates are also economically meaningful: in the parsimonious fixed-effects models, a 1 percentage-point increase in the real interest-rate spread is associated with about a 0.29 percentage-point decrease in annual GDP per capita growth, while a 1-unit increase in the liquidity ratio is associated with about a 1.42 percentage-point increase in growth. Overall, the results support a conditional view of liberalization: what seems to matter most is not just having more finance, but whether reforms reduce borrowing costs, improve how funds move through the financial system, and place exchange-rate adjustment in a setting that reduces distortions instead of making inflation and balance-sheet problems worse

Advisor

Moledina, Amyaz

Second Advisor

Ma, Changzhi

Department

Economics; Statistical and Data Sciences

Keywords

Macro Economics, Developmental Economics, Financial Liberalization, Interest Rate Deregulation, Foreign Exchange, Stock Market Development, Solow Growth Model, Fixed Effects, System GMM

Publication Date

2026

Degree Granted

Bachelor of Arts

Document Type

Senior Independent Study Thesis

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