| Financial liberalization is one of the main reform strategies of developing economies during the globalization process. Development of the more sophisticated financial sectors by the contribution of foreign banks and investors is expected to lead to a sustainable economic growth in these economies. However, free capital mobility, which is another outcome of the financial integration, has led to a highly unstable international financial environment leaving the developing economies in deep financial turmoil.; First, the capital flows under two different policy approaches to liberalization; shock therapy and gradualism are analyzed. Two emerging economies, India and Turkey, which are the two cases of gradualism and shock therapy respectively, are selected for the analysis. The study analyzes the two countries' liberalization reforms and the nature of capital flows in the course of their liberalization. The impact of capital flows on the economies is also examined and the results of a detailed analysis of growth pattern in two countries suggest that there is a strong relation between the economic growth and the non-resident cash flows in the shock therapy case, Turkey. There is also evidence suggesting that India, following a gradualist approach, is less prone to crises with more stable financial variables than Turkey.; The thesis continues with the analysis of the changing dynamics of macroeconomic variables in the process of Turkish and Indian financial liberalization. Results suggest that there is an increased interdependency among the fundamentals as the countries move towards financial liberalization process. There is also evidence on increasing impact of foreign fundamentals suggesting decreased autonomy.; The link between financial liberalization and volatility in emerging markets is the last topic of the thesis. Examining ten emerging stock markets with different degrees of liberalization, it is found that in countries with limited liberalization, events causing sudden changes in volatility are local while fully liberalized markets are subject to global events and so the volatility contagion. There is also evidence on decreasing volatility in the last four years of the analysis, suggesting that maturing liberalization might have a stabilizing effect and might decrease the boom-bust cycles in the stock markets. |
