ON THE GROWTH EFFECTS OF EQUITY MARKET LIBERALIZATION

While equity market liberalization has been found to be associated with faster economic growth, such a correlation alone cannot identify the direction of causation. Using instrumental variables (IV) methodology, this paper presents empirical evidence of strong growth effects of equity market liberalization. Systematic differences exist in the growth effects across countries at different income levels, and with different size of equity markets. Equity market liberalization benefits high-income and middle-income countries through productivity improvements, while growth instead increases in low-income countries as a result of increased physical capital accumulation. Additional growth effects are found for countries having larger equity markets.