DP7393 Financial liberalization and democracy: The role of reform reversals

Author(s): Nauro F. Campos, Fabrizio Coricelli
Publication Date: August 2009
Keyword(s): economic liberalization, financial reform, political liberalization, reform reversals
JEL(s): C23, D72, O38, P16
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7393

The relationship between economic and political liberalization has received a great deal of attention lately, yet the possibility of a non-linear relationship and the role of reversals remain largely neglected. Focusing on democratization and financial reform, this paper offers evidence for a U-shaped relationship across countries, over time as well as in a panel setting using a wide range of estimators for various reform measures. We link this non-linear relationship to the notion of partial or captured democracy. We provide as well econometric support showing that even when de facto is modelled as a function of de jure financial liberalization, this non-linearity obtains.