The relationship between Financial liberalization, Financial Stability and Capital Control: Evidence from a multivariate framework for developing countries

We analyze the dynamic relationship between financial liberalization and financial stability for a panel of 25 developing countries during the period 1986-2010. The empirical study employs the Toda and Yamamoto's (1995) procedure to test for the Granger no-causality between the six variables of our study including: credit-to-GDP ratio, deposit to credit ratio, net interest margin , bank supervision, Liberalization measured by kaopen and capital control proxied by the Quinn index (2007). The results show a first bidirectional causal relationship between financial stability and deposit to credit ratio, a second one between financial stability and capital control and a third one between financial stability and liberalization.