| Summary: | The topic of financial liberalisation has been increasingly explored over the
past several decades. However, existing studies focus largely on the effects financial
liberalisation have on physical capital accumulation. Therefore, this paper seeks to
examine the effects of financial liberalisation on human capital, specifically
education, which is another important form of capital accumulation in an economy. In
order to mitigate the problem of reverse causality, we will be looking at the
intergenerational transmission effect of financial liberalisation on second generations’
education.
In our study, we use individual level education data from the 2008 European
Values Survey and regress it on Abiad and Mody’s (2005) Financial Liberalisation
Index. Our results reveal that the degree of financial liberalisation in parents’ country
of origin is highly significant in determining one’s educational attainment. On
average, an extreme change from 0 to 1 in the index can substantially increase the
respondent’s education level by one level. In addition, we find that indicators of
financial development and financial openness are also highly significant in
determining individual’s educational attainment. These results have important
implications for policy implementation as they reinforce the argument for countries to
become financially liberalised due to the positive effects on human capital
accumulation.
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