Financial Liberalization and Asset Market Behavior *

Abstract

Financial liberalization by the government and associated innovations by the private sector have had profound effects on the financial system of industrial countries. Greater competition in financial services has led to a more efficient financial system and has contributed to a more efficient allocation of financial resources. In general, asset prices provide a more accurate signal for efficient capital allocation. A more competitive financial market structure has contributed to efficiency and also has greatly expanded financial opportunities for consumers and firms. Although volatility has increased for some financial and macroeconomic variables, the macroeconomic system as a whole has shown long-run stability. The rapid growth of market priced financial assets has blurred the distinction between money and other assets. As a result, interest rates have been increasingly emphasized as a policy tool. However, the relation between interest rates and economic activity appears to have weakened.