DP7393 Financial liberalization and democracy: The role of reform reversals

Author(s): Nauro F. Campos , Fabrizio Coricelli

Publication Date: August 2009

Keyword(s): economic liberalization , financial reform , political liberalization , reform reversals

JEL(s): C23 , D72 , O38 , P16

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP7393.asp.asp

The relationship between economic and political liberalization has received a great deal of attention lately, yet the possibility of a non-linear relationship and the role of reversals remain largely neglected. Focusing on democratization and financial reform, this paper offers evidence for a U-shaped relationship across countries, over time as well as in a panel setting using a wide range of estimators for various reform measures. We link this non-linear relationship to the notion of partial or captured democracy. We provide as well econometric support showing that even when de facto is modelled as a function of de jure financial liberalization, this non-linearity obtains.