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Does Capital Account Liberalization Discipline Budget Deficit?

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  • Woochan Kim

Abstract

The paper investigates whether free capital mobility leads a government to tighten its budget deficit for fear of being penalized from the international capital market. The author tests the hypothesis using three-stage least squares (3SLS), which can control for the endogenous nature of capital account liberalization. Even the conservative measure shows that, if capital account liberalization were exogenously imposed, ceteris paribus , government budget deficit would be reduced by 2.275% of GDP. Furthermore, 3SLS results show that this disciplinary effect is stronger for countries under a fixed exchange rate regime or for countries with weak central bank independence. The disciplinary effect is also found to be stronger in more recent periods-the 1990s-during which capital market integration has been most prevalent. Copyright Blackwell Publishing Ltd 2003.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 11 (2003)
Issue (Month): 5 (November)
Pages: 830-844

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Handle: RePEc:bla:reviec:v:11:y:2003:i:5:p:830-844

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Cited by:
  1. Shang-Jin Wei & Irina Tytell, 2004. "Does Financial Globalization Induce Better Macroeconomic Policies?," IMF Working Papers 04/84, International Monetary Fund.
  2. Patnaik, Ila & Gupta, Abhijit Sen & Shah, Ajay, 2010. "Determinants of Trade Misinvoicing," Working Papers, National Institute of Public Finance and Policy 10/75, National Institute of Public Finance and Policy.
  3. Gábor, Tamás, 2012. "China's monetary sterilization and it's economical relationship with the European Union," MPRA Paper 40362, University Library of Munich, Germany.
  4. M. Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(2), pages 143-197, June.
  5. Abhijit Sen Gupta, 2010. "Management of International Capital Flows: The Indian Experience," Competence Centre on Money, Trade, Finance and Development, Hochschule fuer Technik und Wirtschaft, Berlin 1003, Hochschule fuer Technik und Wirtschaft, Berlin.
  6. Zhang, Chenying, 2010. "Sterilization in China: Effectiveness and Cost," Working Papers, University of Pennsylvania, Wharton School, Weiss Center 10-29, University of Pennsylvania, Wharton School, Weiss Center.
  7. Gábor, Tamás & Kiss, Gábor Dávid & Kovács, Péter, 2012. "A monetáris sterilizáció hatékonysága és költségei Kínában
    [The efficiency and costs of monetary sterilization in China]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(2), pages 164-188.
  8. William MILES, 2011. "Financial Globalization And Inflation In Developing Countries: A Reappraisal," Applied Econometrics and International Development, Euro-American Association of Economic Development, Euro-American Association of Economic Development, vol. 11(1).
  9. Lekshmi Nair, 2012. "Policy Disciplining Effect of Capital Account Openness in India," Transition Studies Review, Springer, Springer, vol. 19(1), pages 43-57, September.
  10. Davide Furceri & Aleksandra Zdzienicka, 2012. "Financial Integration and Fiscal Policy," Open Economies Review, Springer, Springer, vol. 23(5), pages 805-822, November.
  11. Richard N. Cooper, 1999. "Exchange rate choices," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, vol. 43(Jun), pages 99-136.

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