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Capital Account Liberalization, The Cost of Capital, and Economic Growth

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  • Henry, Peter B.

    (Stanford U)

Abstract

Three things happen when emerging economies open their stock markets to foreign investors. First, the aggregate dividend yield falls by 240 basis points. Second, the growth rate of the capital stock increases by an average of 1.1 percentage points per year. Third, the growth rate of output per worker rises by 2.3 percentage points per year. Since the cost of capital falls, investment booms, and the growth rate of output per worker increases when countries liberalize the stock market, the increasingly popular view that capital account liberalization brings no real benefits seems untenable.

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Bibliographic Info

Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1778.

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Date of creation: Jan 2003
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Handle: RePEc:ecl:stabus:1778

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  1. Hali J. Edison & Michael W. Klein & Luca Ricci & Torsten Sloek, 2002. "Capital Account Liberalization and Economic Performance: Survey and Synthesis," NBER Working Papers 9100, National Bureau of Economic Research, Inc.
  2. Peter Blair Henry, 2002. "Is Disinflation Good for the Stock Market?," Journal of Finance, American Finance Association, vol. 57(4), pages 1617-1648, 08.
  3. Maurice Obstfeld, 1995. "Risk-Taking, Global Diversification, and Growth," NBER Working Papers 4093, National Bureau of Economic Research, Inc.
  4. Rene M. Stulz, 1999. "Globalization of Equity Markets and the Cost of Capital," NBER Working Papers 7021, National Bureau of Economic Research, Inc.
  5. Henry, Peter Blair, 2000. "Do stock market liberalizations cause investment booms?," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 301-334.
  6. Peter Blair Henry, 2000. "Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices," Journal of Finance, American Finance Association, vol. 55(2), pages 529-564, 04.
  7. Anusha Chari & Peter Blair Henry, 2002. "Capital Account Liberalization: Allocative Efficiency or Animal Spirits?," NBER Working Papers 8908, National Bureau of Economic Research, Inc.
  8. Fischer, S. & Cooper, R.N. & Dornbusch, R. & Garber, P.M. & Massad, C. & Polak, J.J. & Rodrik, D. & Tarapore, S.S., 1998. "Should the IMF Pursue Capital-Account Convertibility?," Princeton Essays in International Economics 207, International Economics Section, Departement of Economics Princeton University,.
  9. Geert Bekaert & Campbell R. Harvey, 1997. "Foreign Speculators and Emerging Equity Markets," NBER Working Papers 6312, National Bureau of Economic Research, Inc.
  10. Anusha Chari & Peter Blair Henry, 2004. "Risk Sharing and Asset Prices: Evidence from a Natural Experiment," Journal of Finance, American Finance Association, vol. 59(3), pages 1295-1324, 06.
  11. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2005. "Does financial liberalization spur growth?," Journal of Financial Economics, Elsevier, vol. 77(1), pages 3-55, July.
  12. Lawrence H. Summers, 2000. "International Financial Crises: Causes, Prevention, and Cures," American Economic Review, American Economic Association, vol. 90(2), pages 1-16, May.
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