FINANCIAL LIBERALIZATION OR FINANCIAL DEVELOPMENT? TESTS USING DELPHI-BASED INDEX OFLIBERALIZATION

Most empirical analysis of the finance-growth nexus has used measures of financial development such as the ratio of monetary or financial assets to GDP to measure financial development. We argue that from a policy perspective measures of financial liberalization or reform are of greater interest and, besides, are less likely to be beset by endogeneity problems which have dogged the empirical growth literature.We develop such a measure by combining the ‘Delphi’ method and principal components analysis to construct an index of financial liberalization for China. Much of China’s financial development has been policy-driven and we could expect to find a distinct difference, at least in timing, between measures of financial reform and financial development. We compare our financial liberalization index to a number of standard measures of financial development and find that there is pervasive evidence that financial liberalization Gr anger-causes financial development but not vice versa.