Publication Type

Journal Article

Publication Date

2008

Abstract

We develop a model of a small open economy with credit market frictions to analyze the consequences of capital account liberalization. We show that financial opening facilitates the inflows of cheap foreign funds and improves production efficiency. Reforms increasing labor market exibility can further improve such efficiency gains. However, capital account liberalization also has important distributional consequences. Specifically, it may be impossible to use public transfers to fully compensate the loss of those negatively affected by capital account liberalization. This explains why financial opening often meets fierce opposition even though it leads to efficiency gains for the economy as a whole. From a practical perspective, capital controls should be lifted gradually for a smooth transition.

Keywords

capital account liberalization, capital controls, financial frictions, macroeconomic fluctuations, asset price overshooting

Discipline

Economics

Research Areas

Macroeconomics

Publication

Review of International Economics

Volume

16

Issue

3

First Page

576

Last Page

590

ISSN

0965-7576

Identifier

10.1111/j.1467-9396.2008.00746.x

Publisher

Wiley

Additional URL

http://dx.doi.org/10.1111/j.1467-9396.2008.00746.x

Included in

Economics Commons

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