1996

Abstract

This study argues that trade policies regarding financial services are an important—but often neglected—determinant of capital flows and financial sector stability. Financial services trade liberalisation which promotes the use of a broad spectrum of financial instruments and allows the presence of foreign financial institutions whilst not unduly restricting their business practices, results in less distorted and less volatile capital flows, and promotes financial sector stability. The study finds significant evidence in favour of this claim through an empirical analysis of GATS commitments in 27 emerging markets. For example, countries which experienced financial crisis during 1991-97 show a combined indicator of financial services trade restrictiveness three times as high (= less favourable for financial stability) as countries without a crisis. The study' s findings have two important policy implications. Firstly, liberalising international trade in financial services can be a market-based means to improve the "quality" of capital flows and to strengthen financial systems. This would complement other policies, including financial regulation. Secondly, even in countries where the financial system is weak, and where immediate, full-fledged financial sector liberalisation is not advisable, certain types of financial services trade could be liberalised, as such trade strengthens the financial system without provoking destabilising capital flows.

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/content/papers/25189808/17
1998-11-01
2022-01-27
http://instance.metastore.ingenta.com/content/papers/25189808/17
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  • Published online: 01 Nov 1998
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