Financial openness and growth: Short-run gain, long-run pain?

Marcel Fratzscher () and Matthieu Bussiere ()

No 348, Working Paper Series from European Central Bank

Abstract: No empirical evidence has yet emerged for the existence of a robust positive relationship between financial openness and economic growth. This paper argues that a key reason for the elusive evidence is the presence of a time-varying relationship between openness and growth over time: countries tend to gain in the short-term, immediately following capital account liberalisation, but may not grow faster or even experience temporary growth reversals in the medium- to long-term. The paper finds substantial empirical evidence for the existence of such an intertemporal trade-off for 45 industrialised and emerging market economies. The acceleration of growth immediately after liberalisation is found to be often driven by an investment boom and a surge in portfolio and debt inflows. By contrast, the quality of domestic institutions, the size of FDI inflows and the sequencing of the liberalisation process are found to be important driving forces for growth in the medium to longer term.

Keywords: liberalisation; capital account; economic growth; intertemporal trade-off; quality of institutions; composition of capital flows; sequencing. (search for similar items in EconPapers)
JEL-codes: F33 F34 F36 F43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk
Date: Written 2004-04
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Persistent link: http://EconPapers.repec.org/RePEc:ecb:ecbwps:20040348

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