Literature Review of financial liberalisation, growth and structural reforms, monetary policy and asset prices

IMF’s recent quarterly bulletin has excellent literature reviews on the 3 topics: 

 

Growth & Structural reforms
As the recovery from the financial crisis firms up, many country authorities will turn their focus from short-term stabilization policies to more structural policies to spur long-term potential growth. This leads to the following questions: Which reforms have the largest and most sustained growth impact? Does the sequencing of reforms matter? This article summarizes recent research on the link between structural reforms and growth, with a particular focus on a paper by Christiansen, Schindler, and Tressel (2009) that examines the joint growth effects of reforms. 

The paper by Christiansen, Schindler, and Tressel says financial reforms matter the most. 

Monetary Policy and asset prices
In a highly influential paper, Bernanke and Gertler (1999) started the debate on how monetary policy should react to asset price fluctuations. A decade and two recessions later, it is a good time to take stock of the recent empirical and theoretical advances on this debate. This article discusses three questions: first, what is the evidence on the effects of asset prices (including housing prices) on the macro economy? Second, how can monetary policy mitigate the effects of asset prices fluctuations? And third, what other policy options can be used to prevent and exit a financial and banking crisis like the one suffered during 2007–09. 

Again the consensus is monetary policy should not react to rising asset prices. However, should be aggressive in the after bust clean up job. The paper also points to some papers which have looked at macroprudential policies with some positive impact. 

Impact of Financial Liberalisation
A number of countries have liberalized their financial systems since the early 1980s. They ceased to control deposit and loan rates, stopped directing bank credits to specific firms, eased restrictions on opening of new branches and the entry of new banks, privatized state-owned banks, and allowed foreigners to trade securities and foreign banks to establish subsidiaries. How have these measures affected economic outcomes? The evidence on growth has been mixed. However, there have been bona fide gains for productive firms, which were able to access finance with ease, and for ordinary consumers, who were able to smooth consumption over time. 

This is an interesting Q&A format with Kenichi Ueda. He answers seven qs on financial liberalisation. 

• Question 1: Has financial liberalization brought economic growth? (evidence is mixed)
• Question 2: Should one expect higher growth rates after financial liberalization? (not necessarily and this is consistent with economic theory as well)
• Question 3: Do crises happen only after financial liberalization? (they can also happen under heavily regulated financial system; again I think there is some confusion with respect to liberalisation and regulation. You need both. Proper regulation is a must if gains from financial liberalisation are to be achieved. The lesson from financial crisis is not whether it was because of financial liberalisation but fixing the regulatory system)
• Question 4: How does the financial system affect firms? (The effect is straight forward)
• Question 5: What are the effects of financial liberalization on firms? (again most studies show positive imapct)
• Question 6: How does the financial system affect consumers?  (helps smooth consumption)
• Question 7: What are the effects of financial liberalization on consumers? (quite large but depends on the state of economy, a developing economy will show higher gains)

Very useful as always.

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