We use a new dataset of de jure measures of trade, capital account, product market, and domestic financial regulation for 91 countries from 1973 to 2005 to test Rajan and Zingales’s (2003) interest group theory of financial development. In line with the theory, we find strong evidence that trade liberalization is a leading indicator of domestic financial liberalization. This result is robust to the use of different data frequencies (annual, 5-year intervals), estimation methods (OLS, 2SLS, system GMM) and a check for non-linear effects. However, in contrast to the theory, we do not find consistent evidence of an effect of capital account liberalization.

We study the interbank markets for overnight loans of the major industrial countries, linking the behavior of short-term interest rates to the operating procedures of these countries’ central banks. We find that many of the key behavioral features of US federal funds rates, on which previous studies have focused, are not robust to changes in institutional details, along both cross-sectional and time-series dimensions of the data. Our results indicate that central banks’ operating procedures and intervention styles play a crucial role in shaping empirical features of short-term interest rates’ day to-to-day behavior in industrial countries.

We use daily data on bank reserves and overnight interest rates to document a striking pattern in the high-frequency behavior of the US market for federal funds: depository institutions tend to hold more reserves during the last few days of each “reserve maintenance period”, when the opportunity cost of holding reserves is typically highest. We then propose and analyze a model of the federal funds market where uncertain liquidity flows and transaction costs induce banks to delay trading and to bid up interest rates at the end of each maintenance period. In this context, the central bank’s interest-rate-smoothing policy causes a high supply of liquid funds to be associated with high interest rates around reserve-settlement days.

Are structural reforms growth enhancing? Is the effectiveness of reforms constrained by a country's distance from the technology frontier or by its institutional environment? This paper takes a new and comprehensive look at these questions by employing a novel data set that includes several kinds of real (trade, agriculture, and networks) and financial (domestic finance, banking, securities, and capital account) reforms for an extensive list of developed and developing countries, going back to the early 1970s. First-pass evidence based on growth breaks analysis and on panel growth regressions suggests that on average, both real and financial sector reforms are positively associated with higher growth. However, on several occasions, botched reforms resulted in growth disasters. More important, the positive reform-growth relationship is shown to be highly heterogeneous and to be influenced by a country's constraints on the authority of the executive power and by its distance from the technology frontier. Finally, there is some evidence that crises, defined as severe growth downturns, are associated with subsequent reform upticks.