Effect of Financial Liberalization on Economic Growth - Research Proposal Example

The paper “Effect of Financial Liberalization on Economic Growth” is a brief variant of the research proposal on macro & microeconomics. Experience indicates that international financial liberalization is a mixed blessing to countries. International borrowing helps individuals' countries smooth consumption and finance productivity investment (Levine, 2011). Foreign investment, on the other hand, can facilitate technological transfer and managerial skills. Portfolio investment and foreign bank lending also contribute to the deepening of domestic financial markets. Some proponents of liberalization have argued that growing the plunder for superior policies and promote more disciplined macroeconomic policies (Levine, 2011).

Financial liberalization, on the other hand, entails several hazards. Resources inflows can result in an appreciation of the home currency and unfavorably influence the trade balance. Huge and sudden inflows can fuel rapid expenditure growth, growing or continued high inflation, and unsustainable current account deficits (Levine, 2011). Financial liberalization in countries with underdeveloped financial systems can make them more crises prone. For example, the rapid expansion in bank lending, fuelled by capital inflows can result in n a deterioration of bank balance sheet which in turn can increase these countries' vulnerability to financial crises. Financial liberalization can be defined as the procedure of contravention away from the state of financial oppression (Shen & Lee, 2006). Financial repression has been closely associated with government fixing of interest rates, the government unfavorable consequences on the financial division as well as on the economy as a whole. Financial liberalization, on the other hand, has been being commonly associated with freeing of interest rates (Shen & Lee, 2006).

• 2.0Statement of the problem

However, it involves a broader view and measures that are geared towards the elimination of the various restrictions on the finance sector as well as the elimination of portfolio boundaries on the banking segment, the reform of the outside sector as well as changes in the institutional structure of the monetary policy. It is generally believed that financial liberalization improves financial sector development, which in turn enhances economic growth (Levine, 2011). Nevertheless, some authors argue that financial liberalization induces risk-taking behavior and may result in banking crises and financial depression like the one in the year 2007 to 2008 (Levine, 2011).

Levine (2011) states that finance is a powerful tool and the financial system can be a powerful medium for economic growth and at the same time can be used for economic destruction. It is obvious that there is a connection between the monetary system and economic growth. However, the questions arise as to what is the character of this relationship? The main rationale of this article is to evaluate decisively and probe the existing and available hypothetical and empirical literature on the relationship between financial liberalization and economic growth, a case study of Australia (Dementriades, & Hussein, 2006).

2.1Research Question
In order to meet the objective of this study, the following research questions will form the basis of our study.

• What is the role of the monetary segment in economic growth?
• Does finance liberalization cause growth or simply follow it?