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Financial openness, policy vs. realized outcomes

Ramsay Bush Georgia

No 2018-04, Working Papers from Banco de México

Abstract: This paper examines how the 1990s capital account liberalization policy trend affected international capital flows, and tests a new hypothesis that the depth and efficiency of the domestic financial system impacts the efficacy of capital account policy. The paper exploits a recently published IMF database on financial development that spans the period 1980-2014 and includes both developing and developed countries. The results confirm that policy on average does not have a significant effect on gross capital flows, when controlling for other factors. I also find no effect on flows disaggregated by type and direction. However, interacting capital account policy and financial development, I do find that for financially developed countries, policy has the expected effect --policy openness leads to capital flows. The implication is that the effectiveness of capital account liberalization requires developing the domestic financial system.

Keywords: financial globalization; financial integration; financial development; capital flows; capital control measures (search for similar items in EconPapers)
JEL-codes: F3 F4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-opm
Date: 2018-04
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