The Effect of Capital Market Liberalization in Eastern Europe: Economic Growth or Financial Crisis

Abstract

The last 20 years have witnessed the financial liberalization of equity markets across the world which have opened the international financing path and resulted in risk diversification, capital cost decreases and investment growth. However, liberalization may have negative effects as well. It often played an important role in the incidence of banking and currency crises by increasing macroeconomic volatility to external shocks. The connection between financial fragility and economic growth can be associated with capital market liberalization. The main aim of this paper is to analyze the effect of financial liberalization in thirteen of Eastern Europe countries, by bringing these two views together. Many of the countries analyzed are post-communist economies that have been in transition in the selected period 1995 – 2007.capital market liberalization, economic growth