Publication Type
Journal Article
Version
submittedVersion
Publication Date
8-2008
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 | International Economics
Research Areas
International Economics
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
Citation
von Hagen, Jürgen and ZHANG, Haiping.
A Welfare Analysis of Capital Account Liberalization. (2008). Review of International Economics. 16, (3), 576-590.
Available at: https://ink.library.smu.edu.sg/soe_research/423
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1111/j.1467-9396.2008.00746.x