Over the last three decades, there has been a move towards liberalization of financial markets across the world. What has been the impact of liberalization of financial markets? Has liberalization increased or decreased the frequency and magnitude of the boom and burst cycles? These are the questions this research paper attempts to answer.

The 1990s may be termed as a tumultuous decade for the capital markets across the world. Economies crumbled in the light of some currency as well as stock market crises that occurred during the decade. One of the characteristic features of the decade was liberalization of financial markets, which had been accused as one of the causes for the umpteen crises.

There are two schools of thought on the issue of financial controls. One school insists on returning to an era of capital controls with both the inflows and outflows being controlled so as to minimize the impact of economic crises. Another school of thought encourages financial liberalization citing all the advantages such as improved functioning of the financial systems, increased availability of funds and cross-country risk diversification. Both parallel thought streams have empirical evidence to strengthen their own argument, but the important element of time is not included in their studies. This paper attempts to factor in the issue of time i.e., it tries to observe what is the impact of financial liberalization on economic cycles in the short-run (immediately after financial liberalization) and in the long-run (four years after financial liberalization). In addition, the paper also considers mature markets rather than focusing on emerging or developing markets alone for empirical evidence.

financial markets, liberalization, burst cycles, tumultuous decade, capital markets, stock market, umpteen crises, financial controls, capital controls, inflows, outflows, economic crises, empirical evidence, economic cycles, mature markets, developing markets, risk diversification, empirical evidence.