ABSTRACT

Financial liberalisation has been a common feature in developing countries in the late 1970s and the 1980s. However, during the 1960s and most of the 1970s, the majority of the Asian countries had tightly regulated and administratively controlled financial systems prior to financial reform. This chapter investigates whether financial liberalisation has reduced liquidity constraints in the Asian countries. The ability of households to borrow and adjust their financial portfolios has important implications for monetary aggregates and consequently for the conduct of monetary policy. Consequently, the relationship between money supply and nominal demand will be affected and ultimately the effectiveness of monetary policy will be reduced. In a regulated financial environment, households often face limits on borrowing, that is, they are subject to liquidity constraints. Financial liberalisation has resulted in the development of a more sophisticated financial system not only in the developed countries but also in the developing countries.