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Capital Account Liberalization: Theory, Evidence, and Speculation

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Author Info
Henry, Peter B. (Henry, Peter B.)
Abstract

Research on the macroeconomic impact of capital account liberalization finds few, if any, robust effects of liberalization on real variables. In contrast to the prevailing wisdom, I argue that the textbook theory of liberalization holds up quite well to a critical reading of this literature. The lion’s share of papers that find no effect of liberalization on real variables tell us nothing about the empirical validity of the theory, because they do not really test it. This paper explains why it is that most studies do not really address the theory they set out to test. It also discusses what is necessary to test the theory and examines papers that have done so. Studies that actually test the theory show that liberalization has significant effects on the cost of capital, investment, and economic growth.

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Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1974.

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Date of creation: Aug 2007
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Handle: RePEc:ecl:stabus:1974

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  1. Pierre-Olivier Gourinchas & Olivier Jeanne, 2006. "The Elusive Gains from International Financial Integration," Review of Economic Studies, Blackwell Publishing, vol. 73(3), pages 715-741, 07. [Downloadable!] (restricted)
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  2. Henry, Peter B., 2003. "Capital Account Liberalization, The Cost of Capital, and Economic Growth," Research Papers 1778, Stanford University, Graduate School of Business. [Downloadable!]
  3. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Harvard Institute of Economic Research Working Papers 1897, Harvard - Institute of Economic Research. [Downloadable!]
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  4. Steven N. Kaplan & Luigi Zingales, 2000. "Investment-Cash Flow Sensitivities are not Valid Measures of Financing Constraints," NBER Working Papers 7659, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Stanley Fischer & Ratna Sahay & Carlos A. Vegh, 2002. "Modern Hyper- and High Inflations," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 837-880, September.
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  6. Jiandong Ju & Shang-Jin Wei, 2006. "A Solution to Two Paradoxes of International Capital Flows," NBER Working Papers 12668, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Peter Blair Henry, 2002. "Is Disinflation Good for the Stock Market?," Journal of Finance, American Finance Association, vol. 57(4), pages 1617-1648, 08. [Downloadable!] (restricted)
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  8. Kim, E Han & Singal, Vijay, 2000. "Stock Market Openings: Experience of Emerging Economies," Journal of Business, University of Chicago Press, vol. 73(1), pages 25-66, January. [Downloadable!] (restricted)
  9. Anusha Chari & Paige P. Ouimet & Linda L. Tesar, 2004. "Acquiring Control in Emerging Markets: Evidence from the Stock Market," NBER Working Papers 10872, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Alfaro, Laura & Hammel, Eliza, 2007. "Capital flows and capital goods," Journal of International Economics, Elsevier, vol. 72(1), pages 128-150, May. [Downloadable!] (restricted)
  11. Shleifer, Andrei & Wolfenzon, Daniel, 2002. "Investor protection and equity markets," Journal of Financial Economics, Elsevier, vol. 66(1), pages 3-27, October. [Downloadable!] (restricted)
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  12. Arturo Galindo & Fabio Schiantarelli & Andrew Weiss, 2005. "Does Financial Liberalization Improve the Allocation of Investment? Micro Evidence from Developing Countries," Boston College Working Papers in Economics 625, Boston College Department of Economics. [Downloadable!]
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  13. Lewis, Karen K., 2000. "Why do stocks and consumption imply such different gains from international risk sharing?," Journal of International Economics, Elsevier, vol. 52(1), pages 1-35, October. [Downloadable!] (restricted)
  14. 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. [Downloadable!] (restricted)
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  15. 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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  16. Holger Görg & David Greenaway, 2004. "Much Ado about Nothing? Do Domestic Firms Really Benefit from Foreign Direct Investment?," World Bank Research Observer, Oxford University Press, vol. 19(2), pages 171-197.
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  17. Anusha Chari & Peter Blair Henry, 2006. "Firm-Specific Information and the Efficiency of Investment," NBER Working Papers 12186, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. de Jong, Frank & de Roon, Frans A., 2005. "Time-varying market integration and expected returns in emerging markets," Journal of Financial Economics, Elsevier, vol. 78(3), pages 583-613, December. [Downloadable!] (restricted)
  19. Romain Wacziarg & Karen Horn Welch, 2003. "Trade Liberalization and Growth: New Evidence," NBER Working Papers 10152, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  20. Chinn, Menzie D. & Ito, Hiro, 2006. "What matters for financial development? Capital controls, institutions, and interactions," Journal of Development Economics, Elsevier, vol. 81(1), pages 163-192, October. [Downloadable!] (restricted)
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  21. Polk, Christopher & Thompson, Samuel & Vuolteenaho, Tuomo, 2006. "Cross-sectional forecasts of the equity premium," Journal of Financial Economics, Elsevier, vol. 81(1), pages 101-141, July. [Downloadable!] (restricted)
  22. Serkan Arslanalp & Peter Blair Henry, 2005. "Is Debt Relief Efficient?," Journal of Finance, American Finance Association, vol. 60(2), pages 1017-1051, 04. [Downloadable!] (restricted)
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  23. Serkan Arslanalp & Peter Blair Henry, 2006. "Debt Relief," NBER Working Papers 12187, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  24. Forbes, Kristin J., 2007. "One cost of the Chilean capital controls: Increased financial constraints for smaller traded firms," Journal of International Economics, Elsevier, vol. 71(2), pages 294-323, April. [Downloadable!] (restricted)
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  25. Barry P. Bosworth & Susan M. Collins and Georgetown University, 2003. "The Empirics of Growth: An Update," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2003-2), pages 113-206. [Downloadable!]
  26. Harrison, Ann E. & Love, Inessa & McMillan, Margaret S., 2004. "Global capital flows and financing constraints," Journal of Development Economics, Elsevier, vol. 75(1), pages 269-301, October. [Downloadable!] (restricted)
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  27. Hali J. Edison & Ross Levine & Luca Antonio Ricci & Torsten Sløk, 2002. "International Financial Integration and Economic Growth," IMF Working Papers 02/145, International Monetary Fund. [Downloadable!]
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  28. Rawi Abdelal & Laura Alfaro, 2003. "Capital and Control: Lessons from Malaysia," Challenge, M.E. Sharpe, Inc., vol. 46(4), pages 36-53, July. [Downloadable!] (restricted)
  29. Henry, Peter Blair, 2000. "Do stock market liberalizations cause investment booms?," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 301-334. [Downloadable!] (restricted)
  30. 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. [Downloadable!] (restricted)
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  31. Lawrence H. Summers, 2000. "International Financial Crises: Causes, Prevention, and Cures," American Economic Review, American Economic Association, vol. 90(2), pages 1-16, May. [Downloadable!] (restricted)
  32. Johnson, Simon & Boone, Peter & Breach, Alasdair & Friedman, Eric, 2000. "Corporate governance in the Asian financial crisis," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 141-186. [Downloadable!] (restricted)
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  33. Chari, Anusha & Henry, Peter B., 2006. "Firm-Specific Information and the Efficiency of Investment," Research Papers 1930, Stanford University, Graduate School of Business. [Downloadable!]
  34. Arslanalp, Serkan & Henry, Peter B., 2006. "Debt Relief," Research Papers 1931, Stanford University, Graduate School of Business. [Downloadable!]
  35. Edison, Hali J. & Warnock, Francis E., 2003. "A simple measure of the intensity of capital controls," Journal of Empirical Finance, Elsevier, vol. 10(1-2), pages 81-103, February. [Downloadable!] (restricted)
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  36. Bodie, Zvi & Merton, Robert C., 2002. "International pension swaps," Journal of Pension Economics and Finance, Cambridge University Press, vol. 1(01), pages 77-83, March. [Downloadable!]
  37. Geert Bekaert & Campbell R. Harvey, 2000. "Foreign Speculators and Emerging Equity Markets," Journal of Finance, American Finance Association, vol. 55(2), pages 565-613, 04. [Downloadable!] (restricted)
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  38. 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. [Downloadable!] (restricted)
  39. Stanley Fischer, 2003. "Globalization and Its Challenges," American Economic Review, American Economic Association, vol. 93(2), pages 1-30, May. [Downloadable!]
  40. Athanasoulis, Stefano G. & van Wincoop, Eric, 2000. "Growth uncertainty and risksharing," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 477-505, June. [Downloadable!] (restricted)
  41. Francesco Caselli & James Feyrer, 2006. "The Marginal Product of Capital," CEP Discussion Papers dp0735, Centre for Economic Performance, LSE. [Downloadable!]
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Full references

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. Tullio Jappelli & Marco Pagano, 2008. "Financial Market Integration Under EMU," CSEF Working Papers 197, Centre for Studies in Economics and Finance (CSEF), University of Salerno, Italy. [Downloadable!]
    Other versions:
  2. M. Ayhan Kose & Eswar Prasad & Marco Terrones, 2008. "Does Openness to International Financial Flows Raise Productivity Growth?," IMF Working Papers 08/242, International Monetary Fund. [Downloadable!]
  3. Philip Arestis & Asena Caner, 2008. "Capital Account Liberalization and Poverty: How Close is the Link?," Working Papers 0811, TOBB University of Economics and Technology, Department of Economics. [Downloadable!]
  4. Henry, Peter B. & Sasson, Diego, 2008. "Capital Account Liberalization, Real Wages, and Productivity," Research Papers 1988, Stanford University, Graduate School of Business. [Downloadable!]
  5. Peter Blair Henry & Diego Sasson, 2008. "Capital Account Liberalization, Real Wages, and Productivity," NBER Working Papers 13880, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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