Financial Liberalization, Fiscal Prudence and Growth: Panel Evidence from 1980–2003

The main objective of this study is to investigate empirical links between financial liberalization, fiscal prudence and growth. More specifically, the hypothesis of whether financial liberalization coupled with fiscal prudence fosters or hinders growth is examined. We use an unbalanced panel dataset of 75 countries and quinquennial averages from 1980 to 2003. Through fixed effects estimations, we uncover that even though financial liberalization does not affect growth significantly, higher degree of financial liberalization in the presence of higher level of fiscal prudence leads to faster growth.