Discussion Paper
No. 2013-26 | April 03, 2013
Tobias Hagen
Impact of National Financial Regulation on Macroeconomic and Fiscal Performance after the 2007 Financial Shock – Econometric Analyses Based on Cross-Country Data


Using cross-country data, this paper estimates the impact of the 2007 financial shock on countries’ macroeconomic developments conditional on national financial regulations before the crisis. For this purpose, the “financial reform index” developed by Abiad et al. (A New Database of Financial Reforms, 2008) is used. The econometric analyses indicate that countries with more deregulated financial markets experienced deeper recessions, stronger employment losses, and larger government budget deficits. Against the background of the ongoing global crisis and the results of other studies, the usefulness of liberalized financial markets for macroeconomic stability and economic development should be rigorously reconsidered.

JEL Classification:

C21, E32, G18


Cite As

[Please cite the corresponding journal article] Tobias Hagen (2013). Impact of National Financial Regulation on Macroeconomic and Fiscal Performance after the 2007 Financial Shock – Econometric Analyses Based on Cross-Country Data. Economics Discussion Papers, No 2013-26, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2013-26

Comments and Questions

Anonymous - referee report 1
May 13, 2013 - 10:20
see attached file

Tobias Hagen - Reply to Comment 1
May 16, 2013 - 08:17
See attached file

Anonymous - referee report 2
May 24, 2013 - 09:28
The author conducts a cross-country analysis of the relationship between financial liberalization prior to the crisis and economic performance for a large number of countries during the crisis. As the author notes the analysis cannot identify channels of influence from liberalization to performance but the author clearly ascribes causality from liberalization to performance. One criticism I have is that the author claims or suggests this causality from liberalization to economic performance with a claim to generality. The evidence is clear in this particular crisis but can one draw the conclusion with respect to financial shocks more generally? Evidence from other crises would be needed for such a conclusion. My second and related criticism is that the causality from financial liberalization is not proven at all. Other factors could explain the empirical results. For example, the nature and the origin of the shock to the financial system may have played roles. The above two points imply in my view that policy conclusions with respect to financial liberalization cannot be drawn without deeper analysis. I don’t think one can draw conclusions without having a view of the channels of influence and without checking whether data are consistent with the specification of the channels. The empirical work has some merit relative to previous (cited) work on the crisis. Some controls are added to simple regression analysis, and the paper includes additional dimensions of economic performance. These additions are not sufficient in my view to merit publication. The proxy for financial liberalization adds the liberalization scores for seven dimensions in the liberalization database. One of these dimensions is strength of capital regulation and supervision. A higher score in this dimension actually represents the opposite of liberalization. If the authors run a regression with strength of capital and regulation and supervision as independent variable the results would most likely show that both stronger regulation and liberalization were associated with poorer academic performance. In conclusion I cannot recommend publication in spite of presentation of interesting data and some improvement on related previous empirical work. I would recommend the author to conduct similar analysis on other crises or to go deeper into channels of influence from liberalization to economic performance.

Tobias Hagen - Reply to referee report 2
May 28, 2013 - 09:35
see attached file