Adjusting to capital account liberalization

Kosuke Aoki, Gianluca Dimiano Carmelo Benigno and Nobuhiro Kiyotaki

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: 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)
Pages: 55 pages
Date: 2010-10-01
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Citations: View citations in EconPapers (24)

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:121723

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