Liberalization Process and Financial Instability: A Mediterranean Perspective

This paper revisits the debate on the financial stability implications of the liberalization process dynamics. We hold that the financial liberalization effect on exchange pressures changes beyond some threshold degrees. Therefore, we assess the ability of the threshold models to gauge financial liberalization dynamics. We provide empirical evidence from 9 MENA countries over the period of 1980 to 2008. Our results suggest that financial integration exerts nonlinear effects on speculative pressure conditionally to the dynamics of the liberalization process. Moreover, the country which maintains an optimal liberalization dynamic will be later exposed to an “exchange pressures“ effect from its financial liberalization process. Alternatively, evolving within nonoptimal dynamics have led to an increase in a country’s vulnerability to speculative pressures since the early stages of liberalization. From this view, the liberal reform dynamics may constitute an important determinant of a country’s financial stability.