Abstract
This paper examines the effect of financial liberalization on long-run income per capita and economic growth in a sample of 10 new EU member countries and Turkey observed quarterly longitudinal panel between 1995 and 2007. Although the presumption is that free trade and financial liberalization have a favourable effect on long-run growth, counter examples also exist where they caused financial fragility, boom-bust cycles and crises. This controversy increases the importance of empirical work in this area. We provide empirical evidence that financial liberalization has impact on economic growth.
We construct different financial openness indicators using panel data for different types of financial flows such as FDI, other investments, portfolio investments, trade openness
index as well as the other control variables. Our static robust and dynamic panel data estimates indicates clear evidence between the long-run growth and a number of
indicators of financial liberalization which confirms the anticipations of the 'new growth theory'. Our results emphasize the importance of financial liberalization as a policy tool.