Discussion paper

DP8087 Adjusting to Capital Account Liberalization

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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Citation

Kiyotaki, N, G Benigno and K Aoki (eds) (2010), “DP8087 Adjusting to Capital Account Liberalization”, CEPR Press Discussion Paper No. 8087. https://cepr.org/publications/dp8087