Publication Type

Working Paper

Version

publishedVersion

Publication Date

8-2007

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 nancial opening facilitates the in ows of cheap foreign funds and improves production e ciency. Reforms increasing labor market exibility can further improve such e ciency gains. However, capital account liberalization also has important distributional consequences. Speci cally, it may be impossible to use public transfers to fully compensate the loss of those negatively a ected by capital account liberalization. This explains why nancial opening often meets erce opposition even though it leads to e ciency 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, uctuations, Asset price overshooting

Discipline

International Economics

Research Areas

International Economics

Volume

19-2007

First Page

1

Last Page

28

Publisher

SMU Economics and Statistics Working Paper Series, No. 19-2007

City or Country

Singapore

Copyright Owner and License

Authors

Comments

Published in Review of International Economics, 2008, https://doi.org/10.1111/j.1467-9396.2008.00746.x

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