Financial Liberalization, Volatility and the Finance-Growth Nexus Nauro F. Campos a;b , Menelaos G. Karanasos a and Bin Tan a a Brunel University, b CEPR and IZA This version: February 4 2011 Abstract This paper studies the impact of nancial liberalization on economic growth. It contributes to this literature by using an innovative econo- metric methodology and unique data set of historical series. It presents power ARCH estimates for Argentina for the period from 1896 to 2000. The main results show that the long-run e/ect of nancial liberalization on economic growth is positive while the short-run e/ect is negative, albeit substantially smaller. Interestingly we nd that nancial development a/ects growth only directly, that is, not through growth volatitlity. JEL Codes: C14, O40, E23, D72 Keywords: economic growth, nancial development, volatility, politi- cal instability, power-ARCH * We thank Luis Catao, Alec Chrystal, Stijn Claessens, Bertrand Candelon, Richard Easterlin, John Hunter, Marika Karanassou, Michail Karoglou, Ayhan Kose, Christopher Martin, Andrew Powell, Marianne Schulze-Ghattas, Mariano Tommasi, anomymous referees and seminar participants at the Centre for Financial and Management Studies at the University of London, University of Macedonia, ETH Zurich, Cass Busi- ness School (EMG Conference), University of Mannheim, Annual Con- ference of the Money, Macro and Finance Research Group (London) and Inter-American Development Bank for valuable comments on previous versions. We would also like to thank Lee Alston, Andres Gallo and Allan Timmermann for kindly sharing their data with us. Previous versions of this paper circulated under the title "Two to Tangle: Financial Devel- opment, Political Instability and Economic Growth in Argentina." The usual disclaimer applies. 1