Does financial liberalization accentuate financial instability?

Dirk Bezemer, Silke Bumann, Robert Lensink

Research output: Chapter in Book/Report/Conference proceedingChapterAcademicpeer-review


The impact of financial liberalization on financial instability is theoretically ambiguous. By including financial liberalization policies in a standard model of the loan market with asymmetric information, this article identifies the entry of risky entrepreneurs and decreased borrowing costs as two channels by which financial instability exerts an impact. A new data set, covering 85 countries during 2000-2009, provides proxies for the financial instability of impaired bank loans. Using an existing measure of financial liberalization, this investigation finds that more liberalized countries experienced a steeper increase in impaired loans after the 2008 global financial crisis. These findings have several research and policy implications.

Original languageEnglish
Title of host publicationInclusive Financial Development
EditorsA.H. Ahmad, D.T. Llewellyn, V. Murinde
PublisherEdward Elgar
Number of pages31
ISBN (Electronic)9781800376380
ISBN (Print)9781800376373
Publication statusPublished - 19 Oct 2021


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