National bureau of economic research, cambridge, ma 028 usa christian lundblad. Capital account liberalization and financial sector stability. Banking crises are harmful for growth, but to a lesser extent in countries with open financial systems and good institutions. We show a statistically significant and economically relevant effect of open capital accounts on financial deepness and economic growth in a crosssection of countries over the period 1986. Capital account liberalization, financial depth, and economic growth. Capital account liberalization and the neoclassical growth model this section illustrates the fundamental predictions of the neoclassical growth model about the impact of capital account liberalization on a developing country. Pdf capital account liberalization, institutional quality. Financial liberalization, banking crises and growth. Stiglitz the world bank, washington, dc, usa summary. While the removal of capital account restrictions is effective.
Second, to have successful capital account liberalization in developing countries, the empirical investigation highlights a need to develop the institutional environment and the private sector as prerequisites. Most importantly, it highlights that reformminded developing countries with low. Roughly speaking, the threshold for capital inflow is the financial development of switzerland in the 1960s, while for outflow it is the financial development of england in the late 1990s. System estimates indicate that cal determines growth through financial development and openness to trade.
Journal of monetary economics 46 2000 3177 financial intermediation and growth. What were the impacts of capital account liberalization on econo mic growth. It shows that financial liberalization spurs on average economic growth. Citeseerx document details isaac councill, lee giles, pradeep teregowda. The views expressed here are those of the author and do not necessarily reflect those of the ecb. Capital account liberalisation, free longterm capital flows, financial crises and economic development i. Capital account liberalization, financial development and industry growth. Capital account liberalization, the cost of capital, and economic growth peter blair henry capital account liberalization was once seen as an inevitable step along the path to economic development for poor countries. Aug 08, 2012 countries with open capital accounts over some or all of this period had a significantly greater increase in financial depth than countries with continuing capital account restrictions, and they also enjoyed greater economic growth. The second indicator, commercialcentral bank, is defined as commercial bank. This paper was prepared for the session, debt, equity, and financial openness at the american economic association meetings in washington, d. Capital account liberalization financial depth core. Pdf capital account liberalization, financial depth, and.
Capital flows, capital account openness, financial liberalization, economic growth authors email address. The estimate of the financial depth equation shows a significant positive effect of an open capital account on financial depth, even when controlling for economic growth. Capital account liberalization, institutional quality and. The role of skill level and financial depth overall, the analysis provides new evidence on the role of crosscountry heterogeneities in shaping distributional responses after capital account openings. Capital account liberalization, the cost of capital, and economic growth by peter blair henry january 2003 stanford university and nber. We next turn to an analysis of the way in which capital account liberalization, by promoting financial deepening, contributes to economic growth. Theoretically, the relation between trade and capital account liberalization is not a simple one. Financial development, financial openness, and economic growth this paper examines the importance of financial development and openness.
Trade liberalization, capital account liberalization and the. The results show that corruption and democratic accountability have a significant and negative impact on economic growth if capital account liberalization is enacted. This paper proposes a threeequations empirical representation of the channels linking capital account liberalization cal and economic growth. We find that capital account liberalization has a robust and direct effect on subsequent economic growth in most countries. Capital account liberalization, financial depth, and economic growth 2005. In this case, however, capital account liberalization is shown to affect economic growth through its effect on financial depth.
The capital account liberalization is a critical policy decision for the emerging market economies emes. Trade liberalization and the politics of financial development. Capital account liberalization does not, however, lead to higher growth in emerging market democracies that have weak welfare states. Capital account liberalization and economic growth revisited. Capital account liberalization, financial depth and economic. The various empirical measures used to gauge the presence of controls on capital account transactions as well as indicators of stock market liberalization are discussed. International financial liberalization and economic growth ross levine abstract this paper pulls together existing theory and evidence to assess whether international. Capital account liberalization, growth and the labor share of.
Capital account liberalization, the cost of capital, and economic growth peter blair henry center on democracy, development, and the rule of law freeman spogli institute for international studies this working paper was produced as part of cddrls ongoing programming on economic and political development in transitional states. Drawing on country experiences, the paper develops an operational framework for sequencing and coordinating capital account liberalization with other policies aimed at maintaining financial sector stability. Countries with open capital accounts over some or all of this period had a significantly greater increase in financial depth than countries with continuing capital account restrictions, and they also enjoyed greater economic growth. Capital account liberalization, financial development and. Mar 24, 2009 the literature on the benefits and costs of financial globalization for developing countries has exploded in recent years, but along many disparate channels with a variety of apparently conflicting results. Capital account liberaliztion, selection bias, and growth. Does financial liberalization matter on capital flows and. Financial deepening, capital account openness, institutions, private sector. Klein fletcher school, tufts university and nber first draft.
Capital account liberalization, financial depth and economic growth. With growth come higher incomes, and with higher incomes come. Theory and evidence article pdf available march 2005 with 409 reads how we measure reads. This paper will examine the effect of capital account liberalization on growth in an attempt to contribute to this debate. The implications of capital account liberalization for economic growth are among the most contentious international monetary and. Capitalmarket liberalization, globalization, and the imf. Capital market liberalization, economic growth, and.
The economic and social effects of financial liberalization. In this paper we examine whether there is evidence of a causal link from capital account liberalization to financial depth and, through this channel, to overall economic growth. Capital account liberalization, financial depth, and economic growth, working papers 996, federal reserve bank of boston, revised 1999. Recently, capital controls have made a comeback as both policymakers and academia have questioned the net benefits of liberalization and economic growth, especially after the 2008 great recession. How and where capital account liberalization leads to.
In order to gauge the effect of capital account liberalization on economic growth through its effect on financial depth, we consider the product of the coefficient of capital account liberalization on the change in financial depth, represented by. This paper examines the link between financial openness and financial development through panel data analysis on advanced and emerging market countries. A synthetic view barry eichengreen, rachita gullapalli and ugo panizza january 2009 abstract this paper synthesizes previous studies analyzing the effects of capital account liberalization on. The residual effect of cal on growth after accounting for these two channels is negligible. Capital account liberalization and economic growth. Capital account liberalization, institutional quality and economic growth. Capitalaccount liberalization, the cost of capital, and economic growth by peter blair henry capital account liberalization was once seen as an inevitable step along the path to economic development for poor countries. For example, indonesia, which had liberalized capital flows in 1970,liberalized interest rates in.
Capital account liberalization, financial depth and economic growth, nber working papers 7384, national bureau of economic research, inc. Measures of financial depth and capital account liberalization. May 10, 2010 while financial liberalization has had significant negative impacts on economic growth implying that financial reforms failed to attract new investment due to adverse investment climate, the effects of trade and capital account liberalizations were rather insignificant, possibly due to weak supply response and lack of credibility of such reform. Benefits and risks from financial liberalisation marcel fratzscher. This provides the foundations for the argument for intervention in shortterm. Financial development, financial openness, and economic. We show a statistically significant and economically relevant effect of open capital accounts on financial deepness and economic growth in a crosssection of countries over the period 1986 to 1995. Capital account liberalization and economic performance. Capital market liberalization, economic growth, and instability. Trade liberalization, capital account liberalization and. This research work aims at exploring the impact of capital account liberalization on economic growth in the 17 emerging economies over the period 1991 2015. Klein and giovanni olivei, title capital account liberalization, financial depth, and economic. A capital account liberalization is a decision by a countrys government to move from a closed capital account regime, where capital may not move freely in and out of the country, to an open capital account system in which capital can enter and leave at will. Capital account liberalization and financial liberalization more generally are inevitable for countries that wish to take advantage of the substantial benefits from participating in the open world economic system in todays age of modern information and communications technologies.
A common explanation as to why empirical studies do not obtain robust results. Shows a statistically significant and economically relevant effect of open capital accounts on financial deepness and economic growth in a crosssection of countries over the period 1986 to 1995. Capital account liberalization and economic growth in. Capital account liberalization, economic growth, globalization. The case for financial sector liberalization in ethiopia kozo kiyota. Countries with open capital accounts over some part or all of these periods had a. Strengthening financial access, depth, stability, and efficiency contributes to reducing income inequality and poverty, which is robust to different datasets and measurements. The literature on the benefits and costs of financial globalization for developing countries has exploded in recent years, but along many disparate channels with a variety of apparently conflicting results. Similarly, klein 2005 empirically examines the link between liberalization of capital account. We revisit the effect of capital account liberalization on economic growth by considering liberalization of capital inflows and capital outflows separately. Financial liberalization, growth and financial crisis. Capitalaccount liberalization, the cost of capital, and economic growth by peter blair henry capitalaccount liberalization was once seen as an inevitable step along the path to economic development for poor countries.
World bank bmz giz workshop managing risk for development in preparation for the world development report 2014. International finance and growth in developing countries. Based on the general principles, a methodology for. Capital account liberalization, financial depth, and. This paper shows that the effects of capital account liberalization on growth depend upon the environment in which that policy change occurs. Using indices, financial openness together with institutional and educational variables explains a large part of the variation in financial development across countries and over time. Olivei, 2008, capital account liberalization, financial depth, and economic growth, journal of international money. For example, in his survey of the research on capital. Does capital account liberalisation promote economic growth. Economywide growth and capital account liberalization are. Liberalizing the capital account, it was said, would permit financial resources to flow from capitalabundant countries, where. Countries with open capital accounts over some or all of this period had a significantly greater increase in financial depth than countries with.
Our theories of financial development need to explain both the relatively high persistence in degree of financial depth as shown in key indicators and the nontrivial changes in the ranking across countries at different moments in time. Capital account liberalization, financial development and industry. There is still little robust evidence of the growth benefits of broad capital account liberalization, but a number of recent papers in the finance literature report that equity market. In that sense we complement the existing literature by saying something about why these two reforms might be related. Third, the effect of financial integration on economic growth also depends on the same preconditions in these countries. Many argue that financial opening spurs economic growth because it. Capital account liberalization, the cost of capital, and. Carlson school of management, university of minnesota, minneapolis, mn 55455, usa central bank of chile, santiago, chile and the world bank, washington, dc 20433, usa. Financial liberalization, economic growth, stability and. In addition, capital market liberalization exposes countries to vicissitudes associated with changes in economic circumstances outside the country. Economywide growth and capital account liberalization are simultaneously determined. However, the interaction term of bureaucracy quality and financial openness has a significant and positive impact on economic growth. Impacts of capital account liberalization on economic.
Capital account liberalization, financial depth, and economic. The expected benefits of financial liberalization and particularly a liberalized capital account are the ability to undertake investments in excess of the level of domestic savings which is especially important for latin american countries with low savings rates and finance economic growth. Measuring capital account liberalization most empirical studies of capital account openness employ a dummy variable from. Capitalaccount liberalization, the cost of capital, and. Countries with open capital accounts over some or all of this period had a significantly greater increase in financial depth than countries with continuing capital account restrictions. Pdf capital account liberalization and economic growth. Capital market liberalization, economic growth, and instability joseph e.
These countries have also experienced the risks in capital flight and financial imbalance. Theory yields no unambiguous prediction of whether opening the capital account is growth enhancing or growth inhibiting. Capital account liberization, financial depth, and economic growth. The positive and significant impact of open capital account on financial depth and economic growth is limited only to developed countries included in the sample in a study by klein and olivei 2001. Impacts of capital account liberalization on economic growth. These results, however, are largely driven by the developed countries included in the sample. The results suggest also that financial sector liberalization, particularly capital account liberalization, widens inequality and the poverty gap. Indiana university, bloomington, in 47405 usa june 2, 2004 abstract we examine the e. Liberalizing the capital account, it was said, would permit. It discusses the results of an empirical analysis between both variables and economic growth. A plausible explanation is that financial development is a concomitant of successful economic growth, and a growing financial sector in an economy open to trade cannot long be insulated from crossborder financial flows. Capital account liberalization continues to have an important role in the determination of financial depth for the oecd countries included in the crosssection. We show a statistically significant and economically relevant effect of open capital accounts on financial depth and economic growth in a crosssection of countries over the period 1986 to 1995, as well as over the period 1976 to 1995. Essays on financial liberalisation, financial crises and economic growth a thesis submitted to the university of manchester for the degree of doctor of philosophy in the faculty of humanities 2014 zeeshan atiq school of social sciences economics.
The framework is not novel, but it brings clarity to the discussion of the empirical literature that follows in. Different effects of inflow and outflow liberalization qin gou, yiping huang and jianguo xu preliminary draft. Klein, luca antonio ricci, and torsten slok this paper surveys the literature on the effects of capital account openness and stock market liberalization on economic growth and provides a synthesis in which. Does capital account liberalization spur economic growth. Pdf capital account liberalization, financial depth and. With growth come higher incomes, and with higher incomes come the stronger institutions and policies needed to manage capital flows and heighten the likelihood that the benefits of an open capital account. Unfortunately, the results of these studies have been mixed at best. The case for capital market liberalization is largely based on standard efficiency arguments, employing a conventional neoclassical model and ignoring the special ways in which financial and capital markets differ from markets for ordinary goods and services, such as steel. This paper analyzes the linkages between capital account liberalization and other policies influencing financial sector stability. The case for financial sector liberalization in ethiopia.
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