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Essays on optimal financial market regulation in open economies
Abstract
The dissertation investigates the macroeconomic consequences of financial liberalization (FL) in less developed countries (LDCs). The dissertation develops a theoretical and empirical critique of the two dominant paradigms of FL, viz., neoclassical and neostructuralist theories; develops and tests aspects of a dynamic theory of FL, termed the "noise-led" theory of development; and utilizes heretofore unexploited data on stock returns and share prices in LDCs in adapting measures of financial market volatility in order to assess the macroeconomic consequences of FL. The dissertation argues that FL is likely to distort economic development and to induce increased financial market volatility. The main implication of this work is that in the wake of FL investment may be misallocated and the macroeconomy destabilized. Hence, in the context of resource scarce LDCs, FL provides a poor foundation for sustained economic growth. The conclusions reached here contradict those reached by neoclassical and neostructuralist theories. These paradigms are found to be unable to account for the disappointing experiences of the LDCs with FL. The noise-led theory addresses these failures. According to the noise-led theory, while FL does not impede economic growth per se, it does lead to a particular kind of development, termed here noise-led development. Noise-led development is characterized by a preponderance of high risk investment practices, fragile financial structures and ultimately by lower rates of real-sector growth than would prevail in the absence of liberalization. The central proposition of the noise-led theory--viz., that FL discourages long-term real sector investment--is tested for a range of liberalized Latin American and Asian countries. The hypothesis is supported for Colombia, Indonesia, Malaysia, and Venezuela. The dissertation argues that FL induces increased financial market volatility. Several types of volatility indexes (VIs) are developed to test this hypothesis. It is found that FL may indeed have induced greater volatility in Chile, Korea, the Philippines, and Venezuela. This evidence suggests that contra the conventional wisdom, the Asian FL experiments may share more of the problems associated with the Latin American experiences than is generally assumed.
Subject Area
Finance
Recommended Citation
Grabel, Ilene Jill, "Essays on optimal financial market regulation in open economies" (1992). Doctoral Dissertations Available from Proquest. AAI9305831.
https://scholarworks.umass.edu/dissertations/AAI9305831