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Capital market liberalization: Optimal tradeoff and bargaining delay

Baomin Dong, Xinhua Gu and Huasheng Song

The North American Journal of Economics and Finance, 2017, vol. 39, issue C, 78-88

Abstract: Host and investing countries are faced with a tradeoff between growth and volatility arising from capital flows. The host country seeks capital inflows for high growth, yet worries about accompanying volatility so much that it limits capital market opening due to its financial weakness. However, the investing country solicits quick and safe returns from capital outflows by requesting wide foreign openness. It is often observed that one side’s push for opening encounters the other side’s reluctance. We examine how this conflict of interest is resolved for international compromise equilibrium through sequential bargaining between the two sides with private valuations of capital flows. We find that openness bargaining can end up with strategic delay after information revelation. This finding sheds light on certain puzzles in international finance.

Keywords: Financial integration; Volatility; Growth; Capital controls; Bargaining (search for similar items in EconPapers)
JEL-codes: C78 D84 F15 F36 F41 F59 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.najef.2016.12.003

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