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Financial Liberalization in a Small Open Economy

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  • Jürgen Hagen

    ()

  • Haiping Zhang

    ()

Abstract

We address three related questions concerning financial liberalization in a small open economy. Does financial liberalization and the resulting capital inflow improve production efficiency in the domestic economy? Who benefits from financial liberalization in the long run and in the short run? Should financial liberalization be implemented gradually or hastily? Our main results are as follows. First, whether financial deregulation in one sector can improve production efficiency may depend on financial regulation in other sectors. Second, financial liberalization may have opposite welfare implications to domestic agents with different productivity in the long run. Third, although some domestic agents lose in the long run, they actually benefit from financial liberalization during the transitional process of deregulation. Finally, a gradual implementation helps achieve a smooth transition. Copyright Springer Science + Business Media, LLC 2006

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File URL: http://hdl.handle.net/10.1007/s11079-006-0355-9
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 17 (2006)
Issue (Month): 4 (December)
Pages: 373-398

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Handle: RePEc:kap:openec:v:17:y:2006:i:4:p:373-398

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: financial liberalization; macroeconomic fluctuations; overshooting;

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  1. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.
  2. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
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  4. Rene M. Stulz, 2005. "The Limits of Financial Globalization," NBER Working Papers 11070, National Bureau of Economic Research, Inc.
  5. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2001. "International and domestic collateral constraints in a model of emerging market crises," Journal of Monetary Economics, Elsevier, vol. 48(3), pages 513-548, December.
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  7. Kosuke Aoki & Gianluca Benigno & Nobuhiro Kiyotaki, 2010. "Adjusting to Capital Account Liberalization," CEP Discussion Papers dp1014, Centre for Economic Performance, LSE.
  8. Alessandria, George & Qian, Jun, 2005. "Endogenous financial intermediation and real effects of capital account liberalization," Journal of International Economics, Elsevier, vol. 67(1), pages 97-128, September.
  9. Iacoviello, Matteo & Minetti, Raoul, 2006. "International business cycles with domestic and foreign lenders," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 2267-2282, November.
  10. Gilchrist, Simon & Leahy, John V., 2002. "Monetary policy and asset prices," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 75-97, January.
  11. Ricardo J. Caballero & Arvind Krishnamurthy, 2003. "Excessive Dollar Debt: Financial Development and Underinsurance," Journal of Finance, American Finance Association, vol. 58(2), pages 867-894, 04.
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Cited by:
  1. Heijdra, Ben J. & Ligthart, Jenny E., 2007. "Fiscal policy, monopolistic competition, and finite lives," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 325-359, January.
  2. Gerling, Kerstin, 2008. "The Real Consequences of Financial Market Integration when Countries Are Heterogeneous," Working Papers 141, Oesterreichische Nationalbank (Austrian Central Bank).
  3. von Hagen, Jürgen & Zhang, Haiping, 2008. "Financial frictions, capital reallocation, and aggregate fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 32(3), pages 978-999, March.
  4. Haiping Zhang & Jurgen von Hagen, 2007. "Financial Development and International Capital Flows," Working Papers 16-2007, Singapore Management University, School of Economics.
  5. repec:onb:oenbwp:y::i:141:b:1 is not listed on IDEAS

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