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Liberalizing Capital Flows in India: Financial Repression, Macroeconomic Policy and Gradual Reforms

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Kenneth Kletzer (University of California Santa Cruz)

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Abstract

Capital account liberalization in financially repressed economies often leads to a period of rapid capital inflows followed by financial crisis. This paper considers the vulnerability of the Indian economy to financial crises with international financial integration and the policy agenda for further liberalization of capital flows. The legacy of financial repression on fiscal and financial policies poses the primary challenge to stable integration of the domestic financial markets of India with international capital markets. Brief overviews of the theory and experience of liberalization elsewhere and of the recent liberalization by India frame the discussion of the risks of liberalization and sequencing of policy reforms.

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Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number 1006.

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Date of creation: 01 Jul 2004
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Handle: RePEc:cdl:ucscec:1006

Note: oai:cdlib1.org:ucscecon-1006
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Nirvikar Singh & T. Srinivasan, 2004. "Fiscal Policy in India: Lessons and Priorities," Santa Cruz Center for International Economics, Working Paper Series 1020, Center for International Economics, UC Santa Cruz. [Downloadable!]
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  2. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  3. Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany. [Downloadable!]
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  4. Dekle, Robert & Kletzer, Kenneth, 2003. "The Japanese banking crisis and economic growth: Theoretical and empirical implications of deposit guarantees and weak financial regulation," Journal of the Japanese and International Economies, Elsevier, vol. 17(3), pages 305-335, September. [Downloadable!] (restricted)
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  5. Renu Kohli & Kenneth Kletzer, 2001. "Financial Repression and Exchange Rate Management in Developing Countries: Theory and Empirical Evidence for India," IMF Working Papers 01/103, International Monetary Fund. [Downloadable!]
  6. Peter Blair Henry, 2003. "Capital-Account Liberalization, the Cost of Capital, and Economic Growth," American Economic Review, American Economic Association, vol. 93(2), pages 91-96, May. [Downloadable!]
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  7. Kenneth Rogoff & M. Ayhan Kose & Eswar Prasad & Shang-Jin Wei, 2004. "Effects on Financial Globalization on Developing Countries: Some Empirical Evidence," IMF Occasional Papers 220, International Monetary Fund.
  8. Robert Dekle & Kenneth Kletzer, . "Domestic Bank Regulation and Financial Crises: Theory and Empirical Evidence from East Asia," IMF Working Papers 01/63, International Monetary Fund. [Downloadable!]
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  9. Maurice Obstfeld, 1995. "Risk-Taking, Global Diversification, and Growth," NBER Working Papers 4093, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. M. Ayhan Kose & Eswar Prasad & Marco Terrones, 2003. "Financial Integration and Macroeconomic Volatility," IMF Working Papers 03/50, International Monetary Fund. [Downloadable!]
  11. Lucas, Robert E, Jr, 1990. "Why Doesn't Capital Flow from Rich to Poor Countries?," American Economic Review, American Economic Association, vol. 80(2), pages 92-96, May. [Downloadable!] (restricted)
  12. repec:rus:hseeco:123922 is not listed on IDEAS
  13. Ila Patnaik & Ajai Shah, 2004. "Interest Rate Volatility and Risk in Indian Banking," IMF Working Papers 04/17, International Monetary Fund. [Downloadable!]
  14. Ila Patnaik, 2003. "The Consequences of currency intervention in India," Indian Council for Research on International Economic Relations, New Delhi Working Papers 114, Indian Council for Research on International Economic Relations, New Delhi, India. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Abhijit Sen Gupta, 2008. "Cost of Holding Excess Reserves: The Indian Experience," Indian Council for Research on International Economic Relations, New Delhi Working Papers 206, Indian Council for Research on International Economic Relations, New Delhi, India. [Downloadable!]
  2. Abhijit Sen Gupta, 2007. "Does Capital Account Openness Lower Inflation?," Indian Council for Research on International Economic Relations, New Delhi Working Papers 191, Indian Council for Research on International Economic Relations, New Delhi, India. [Downloadable!]
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  3. Partha Sen, 2007. "Capital Inflows, Financial Repression And Macroeconomic Policy In India Since The Reforms," Working papers 157, Centre for Development Economics, Delhi School of Economics. [Downloadable!]
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  4. Philip R. Lane & Sergio L. Schmukler, 2006. "The international financial integration of China and India," Proceedings, Federal Reserve Bank of San Francisco, issue Jun. [Downloadable!]
    Other versions:
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