The Effect of Capital Account Liberalization on Financial Deepening

Reducing financial constraints on border transactions between countries has led to an expansion of the liberalization and financial integration debate. In this study, the effect of the capital account liberalization on financial deepening as the last step of the financial liberalization has been analyzed in the selected group of developed and developing countries over the period 1990 -2017, which is emphasis on the criterion of capital account freedom provided by Chienne and Aito (2006) that are based on the main component of the binary variables of borderline financial constraints rather than the definition of capital account control. The experimental results show that in developing countries the positive impact of capital account liberalization on financial deepening (ratio of credits Granting to the private sector) is lower compared to developed countries due to the weak institutional quality and the lack of equilibrium in macroeconomics and the small role of the private sector in economic activities compared to developed countries,. Also, the results strongly emphasize the significant impact of financial infrastructure on financial deepening, especially in the international movement sector, as the level of initial capital account. Other significant results indicate a significant effect of the banking crisis, exchange rate and commercial freedom on financial deepening.