Three essays on financial liberalization, financial market, and economic growth: The empirical evidence from Taiwan

This study analyzes the effect of financial liberalization policies of Taiwan during the 1980s on firm values, financial markets, and economic growth. First, the study investigates the impact of the foreign exchange market liberalization policy implemented in mid-1987 on firm's foreign exchange exposure by using a nonparametric estimation technique-local linear regression method. The finding indicates that the financial liberalization policy introduces a structural change on firm's foreign exchange exposure. In pre-liberalization period, no firm shows significant exposure to the change of exchange rate. However, in post-liberalization period, values of international trade oriented firms are strongly influenced by the change of exchange rate.; Second, the study examines the impact of the relaxing of international investment restriction on the interdependence of Taiwan stock market and closed-end Taiwan Fund prices. A vector autoregressive (VAR) model and an event study model are employed. The empirical result shows that Taiwan stock market is affected by Tokyo, New York, and Hong Kong stock markets after Taiwan allowed foreign institution investors to directly invest in its stock market in 1991. The result also shows that the announcement of a loosening of international investment restrictions decreases the Taiwan Fund price-net asset value (NAV) ratio. These evidence indicate that government imposed barriers in the past have been effective in segmenting Taiwan capital market from international capital markets.; Third, this study investigates empirically the causal relationship between financial development and economic growth in Taiwan under the Granger causality framework. Five financial proxies is used to capture a wider aspect of financial development. The empirical result suggests that unique causality direction from economic growth to financial development or from financial development to economic growth is rejected. However, the feedback effect between financial development and economic growth is supported by the empirical evidence.