Labor Market Institutions and the Effects of Financial Openness

Qingyuan Du, Jun Nie and Shang-Jin Wei

No RWP 19-11, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: We propose a new channel to explain why developing countries may fail to benefit from financial globalization, based on labor market institutions. In our model, financial openness in a developing country with a rigid labor market leads to capital outflow, and both employment and output fall. In contrast, financial openness in a developing country with a flexible labor market benefits the country. Our model suggests that enhancing labor market flexibility is a complementary reform for developing countries opening capital accounts.

Keywords: Developing Countries; capital account liberalization; Labor Market Rigidity; Financial Openness; Unemployment (search for similar items in EconPapers)
JEL-codes: E24 F41 F44 J08 (search for similar items in EconPapers)
Pages: 1-39
Date: 2019-11-26, Revised 2020-02-03
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-mac and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedkrw:87673

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DOI: 10.18651/RWP2019-11

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