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Middle East and Central Asia > Jordan

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  • Type: Journal Issue x
  • Allocative Efficiency; Cost-Benefit Analysis x
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Cover IMF Working Papers
The Quality Effect: Does Financial Liberalization Improve the Allocation of Capital?
Mr. Abdul d Abiad
,
Nienke Oomes
, and
Mr. Kenichi Ueda
The study documents evidence of a "quality effect" of financial liberalization on allocative efficiency, which is measured by the dispersion in Tobin's Q across firms. Based on a simple model, the authors predict that financial liberalization, by equalizing access to credit, reduces the variation in expected marginal returns. They test this prediction using a new financial liberalization index and firm-level data for five emerging markets: India, Jordan, Korea, Malaysia, and Thailand. They find strong evidence that financial liberalization, rather than financial deepening, improves allocative efficiency.
Keywords:
WP; financial liberalization; bank credit; dependent variable; liberalization index; Tobin’s Q; investment; allocative efficiency; inequality; liberalization subcomponent; credit allocation; inflation rate; production function; liberalization date; stock market capitalization; book value; liberalization exercise; Stock markets; Inflation; Credit; Market capitalization; Financial sector; East Asia; Global