Adjusting to Capital Account Liberalization
Gianluca Benigno and
CEP Discussion Papers from Centre for Economic Performance, LSE
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.
Keywords: credit frictions; capital account liberalization (search for similar items in EconPapers)
JEL-codes: F32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ifn and nep-opm
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Working Paper: Adjusting to Capital Account Liberalization (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:cep:cepdps:dp1014
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