Discussion paper

DP13776 Financial Crises and Liberalisation: Progress or Reversals?

Financial crisis can trigger policy reversals, i.e. they can lead to a process of re-
regulation of financial markets. Using a recent comprehensive dataset on financial
liberalization across 94 countries for the period between 1973 and 2015, we formally
test the validity of this prediction for the member states of the European Union as well
as for a global sample. We contribute by (a) using a new up-to-date dataset of reforms
and crises and (b) subjecting it to a combination of diff erence-in-di fferences and local
projection estimations. In the global sample, our fi ndings consistently confi rm that
crises lead to a reversal of liberal reforms, suggesting that governments react to crises by
re-regulating financial markets. However, in a dynamic setting with impulse-responses,
we also find that these new regulations are only temporary and a liberalization process
restarts a few years after a financial crisis. One decade later, fi nancial markets have
returned to their pre-crisis level of liberalization. In the EU sample, however, we do
not fi nd sucient evidence to support these observations.


Saka, O, N Campos, P De Grauwe, Y Ji and A Martelli (2019), ‘DP13776 Financial Crises and Liberalisation: Progress or Reversals?‘, CEPR Discussion Paper No. 13776. CEPR Press, Paris & London. https://cepr.org/publications/dp13776