The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
A study of 53 countries during 1980-95 finds that financial liberalization increases the probability of a banking crisis, but less so where the institutional environment is strong. In particular, respect for the rule of law, a low level of corruption, and good contract enforcement are relevant institutional characteristics. The data also show that, after liberalization, financially repressed countries tend to have improved financial development even if they experience a banking crisis. This is not true for financially restrained countries. This paper’s results support a cautious approach to financial liberalization where institutions are weak, even if macroeconomic stabilization has been achieved.