Assessing the Economic Effects of Financial Market Deregulation on Economic Stability and Growth

Abstract

This paper looks at the economic impacts of financial market deregulation through analyzing a case where there was market deregulation: the US financial market after the 1990s, and in comparison, with EU markets after 2008, where financial markets are regulated. Using data collected from the WDI (World Bank-World Development Indicators) and stock returns data collected from Bloomberg and Yahoo Finance, the research analyses the effect of deregulation on the economy using GDP growth, growth in investment, and market volatility as the variables. From the analysis, deregulation results in an increase in GDP growth rate from 2.5% before the deregulation period to 4.1% after deregulation, as well as an increase in growth of investment from 3.2% to 5.4%. However, the gains come with an increase in volatility, 10.5, while in a regulated market, such as in the EU, after the year 2008, GDP growth is 1.2% and volatility 3.2%. These findings indicate that although deregulation is capable of promoting economic development, it does cause considerable instability in markets. It would therefore be desirable for policy makers to achieve a balance between regulation, innovation, and finance security practices. Future research may wish to examine the effects of deregulation in the long run on income inequality and sustainability in developing countries.