Capital Account Liberalization: Theory, Evidence, and Speculation

Peter Henry
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Peter Henry: Graduate School of Business, Stanford University

No 07-004, Discussion Papers from Stanford Institute for Economic Policy Research

Abstract: Research on the macroeconomic impact of capital account liberalization finds few, if any, robust effects of liberalization on real variables. In contrast to the prevailing wisdom, I argue that the textbook theory of liberalization holds up quite well to a critical reading of this literature. The lion’s share of papers that find no effect of liberalization on real variables tell us nothing about the empirical validity of the theory, because they do not really test it. This paper explains why most studies do not really address the theory they set out to test. It also discusses what is necessary to test the theory and examines papers that have done so. Studies that actually test the theory show that liberalization has significant effects on the cost of capital, investment, and economic growth.

Keywords: capital account liberalization; macroeconomic impact; cost of capital; investment; economic growth (search for similar items in EconPapers)
JEL-codes: E01 (search for similar items in EconPapers)
Date: 2007-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (380)

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