Adjusting to Capital Account Liberalization
Gianluca Benigno and
No 8087, CEPR Discussion Papers from C.E.P.R. Discussion Papers
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: capital account liberalization; credit frictions; domestic financial markets (search for similar items in EconPapers)
JEL-codes: F32 (search for similar items in EconPapers)
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Working Paper: Adjusting to Capital Account Liberalization (2010)
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