Crash-Free Sequencing Strategies for Financial Development and Liberalization

IMF Staff Papers, Vol. 48, No. 1, pp. 179-96

Posted: 5 May 2008

See all articles by Jorge A. Chan-Lau

Jorge A. Chan-Lau

International Monetary Fund (IMF) - International Capital Markets Department

Zhaohui Chen

International Monetary Fund (IMF)

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Abstract

This paper uses a stylized model of financial intermediation to characterize the exact circumstances along various paths of economic growth, financial development, and liberalization that can trigger a financial crisis. It shows how to avoid financial crises through proper sequencing of various financial development and liberalization measures. The results of the paper show that naive combinations of financial development and liberalization processes can give rise to financial crises. In some typical situations, in order to avoid a financial crisis, it is important that financial liberalization be accompanied by financial development, in the form of improvements in the financial sector's efficiencies. In the case of fast growing economies, financial development becomes even more imperative.

Keywords: financial crisis, financial liberalization, financial development, sequencing

JEL Classification: E44, F3, G15

Suggested Citation

Chan-Lau, Jorge Antonio and Chen, Zhaohui, Crash-Free Sequencing Strategies for Financial Development and Liberalization. IMF Staff Papers, Vol. 48, No. 1, pp. 179-96, Available at SSRN: https://ssrn.com/abstract=1128336

Jorge Antonio Chan-Lau (Contact Author)

International Monetary Fund (IMF) - International Capital Markets Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Zhaohui Chen

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6480 (Phone)
202-623-4740 (Fax)

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