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Adjusting to Capital Account Liberalization

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Author Info

  • Kosuke Aoki
  • Gianluca Benigno
  • Nobuhiro Kiyotaki

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.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1014.

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Date of creation: Oct 2010
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Handle: RePEc:cep:cepdps:dp1014

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Keywords: credit frictions; capital account liberalization;

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