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Capital account liberalization: theory, evidence, and speculation

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  • Peter Blair Henry

Abstract

Writings on the macroeconomic impact of capital account liberalization find 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 Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2007-32.

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Date of creation: 2006
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Handle: RePEc:fip:fedfwp:2007-32

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