Effects of Financial Liberalization on Macroeconomic Volatilities: Applications to Economic Growth, Exchange Rate and Exchange Rate Pass-Through

This paper explores effects of financial liberalization on macroeconomic volatilities (such as economic growth, real exchange rate and exchange rate pass through) in developing countries. It also examines the interaction between such volatilities in a theoretical and empirical framework of a macro-model. To this end, we have used data of 43 developing economies over the period of 1996- 2005, and then estimated a panel-simultaneous equation system to find out the effects of financial liberalization on macroeconomic volatilities. Empirical results show a significant inverse effect of financial liberalization on economic growth volatility. But effects of the financial liberalization on the volatilities of real exchange rate and exchange rate pass-through have been positive and significant as expected. Furthermore, the results show that such volatilities have a significant interacted relationship.