Rethinking the Effects of Financial Liberalization

Jaume Ventura and Fernando Broner

No 8171, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: During the last few decades, many emerging markets have lifted restrictions on cross-border financial transactions. The conventional view was that this would allow these countries to: (i) receive capital inflows from advanced countries that would finance higher investment and growth; (ii) insure against aggregate shocks and reduce consumption volatility; and (iii) accelerate the development of domestic financial markets and achieve a more efficient domestic allocation of capital and better sharing of individual risks. However, the evidence suggests that this conventional view was wrong. In this paper, we present a simple model that can account for the observed effects of financial liberalization. The model emphasizes the role of imperfect enforcement of domestic debts and the interactions between domestic and international financial transactions. In the model, financial liberalization might lead to different outcomes: (i) domestic capital flight and ambiguous effects on net capital flows, investment, and growth; (ii) large capital inflows and higher investment and growth; or (iii) volatile capital flows and unstable domestic financial markets. The model shows how these outcomes depend on the level of development, the depth of domestic financial markets, and the quality of institutions

Keywords: Financial liberalization; Capital flows; Economic growth; Enforcement; Sovereign risk (search for similar items in EconPapers)
JEL-codes: F34 F36 F43 G15 O19 O43 (search for similar items in EconPapers)
Date: 2010-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (43)

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Related works:
Working Paper: Rethinking the Effects of Financial Liberalization (2015)
Working Paper: Rethinking the Effects of Financial Liberalization (2010)
Working Paper: Rethinking the effects of financial liberalization (2008)
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