Financial Liberalization and Price Stability

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Cho, YoonJe; Han, Aaron K.

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Institute of Economic Research, Seoul National University
Seoul Journal of Economics, Vol.1 No.3, pp. 291-300
high inflationoptimal interest rate
Since the seminal works of McKinnon (1973) and Shaw (1973), the idea of financial liberalization for the development of the financial sector and higher economic growth has become an orthodoxy in academia as well as in international economic institutions. With the seal of approval, many developing countries followed, experimenting with their own economy. Yet most of the results so far have been puzzling. Instead of prosperity, the countries have found themselves in financial crisis and instability. They have been forced back to the repressive financial policy, regressing back to economies riddled with bankruptcies and lacking in capital. Observing these disappointing experiences, economists have tried to investigate the cause of failures and to provide new policy recommendations: there have been many studies on the experience of Southern cone countries' experiences (Corbo, de Melo and Tybout 1986; Diaz-Alexandro 1985; McKinnon 1982, 1986; Tybout 1986). These studies do not, however, provide an answer to the question on what would be an appropriate financial liberalization policy. The studies fall short of identifying the fundamental factors that drove the financial liberalization policy to end up with disastrous outcome.
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College of Social Sciences (사회과학대학)Institute of Economics Research (경제연구소)Seoul Journal of Economics (SJE)Seoul Journal of Economics vol.01(3) (Fall 1988)
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