The effects of financial liberalization policy on the financial system, financial asset preference, and economic growth in Korea

A great deal of literature on the developed countries (DCs) shows the positive contribution of financial development to economic growth. However, it is difficult to expect this kind of financial development in less developed countries (LDCs) in which the financial systems are repressed. In these cases, financial liberalization is suggested for financial development.;Korea, despite its relatively high economic growth, is a country which kept a repressed financial system until the late 1970s. This continued financial repression had made the Korean economy rigid and inefficient. Since the early 1980s, the economic liberalization policies have been aimed to encourage private incentives and to recover the market mechanism.;The financial liberalization was part of the overall economic liberalization. Throughout the 1980s-1990s, there have been three major attempts for financial liberalization. The first attempt was made in the early 1980s, which included comprehensive policy measures for a variety of financial systems. The second financial liberalization in December 1988 focused on the interest rate liberalization. Finally, the four stage interest rate liberalization plan announced in 1991 is being implemented.;These liberalization policies have changed the Korean financial system substantially. Increasing the share of non-bank financial intermediaries and expansion of stock markets have increased the importance of interest rate and stock market variables, along with the traditional factors, in financial decision making.;Theoretical models are developed to examine the systematic relationships among the major financial behaviors based on the structural characteristics made by the financial liberalization measures in Korea. The empirical tests show that the changes in Korea's financial system prove to contribute to increases in financial savings and economic growth. However, there still exist general aspects of financial repression in financial systems. Empirical findings also provide the evidence for speculative aspects and inefficiency of stock markets in Korea.;Even though its financial system is still repressed and its liberalization has been made slowly, the financial liberalization in Korea can be evaluated as successful, compared to those of other LDCs which propelled abrupt and comprehensive financial liberalization resulting in financial instability and disappointing economic growth.