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Discussion Paper Details

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Title: Adjusting to Capital Account Liberalization

Author(s): Kosuke Aoki, Gianluca Benigno and Nobuhiro Kiyotaki

Publication Date: October 2010

Keyword(s): capital account liberalization, credit frictions and domestic financial markets

Programme Area(s): International Macroeconomics

Abstract: We study theoretically how the adjustment to liberalization of international financial transaction depends upon the degree of domestic financial development. Using a model with domestic and international borrowing constraints, we show that, when the domestic financial system is underdeveloped, capital account liberalization is not necessarily beneficial because TFP stagnates in the long-run or employment decreases in the short-run. Government policy, including allowing foreign direct investment, can mitigate the possible loss of employment, but cannot eliminate it unless the domestic financial system is improved.

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Bibliographic Reference

Aoki, K, Benigno, G and Kiyotaki, N. 2010. 'Adjusting to Capital Account Liberalization'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8087