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Effects of Capital Flow Liberalization

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  • Tahsin Saadi Sedik
  • Tao Sun

Abstract

This paper analyzes the experiences of emerging market economies (EMEs) that have liberalized capital flows over the past 15 years with respect to macroeconomic performance and risks to financial stability. The results of the panel data regressions indicate that greater openness to capital flows is associated with higher growth, gross capital flows, and equity returns and with lower inflation and bank capital adequacy ratios. The effects vary depending on thresholds. As a potential application of these findings, the paper explores the possible effects of liberalization on China by applying the coefficients of explanatory variables to the corresponding variables of China in 2012–16.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/275.

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Length: 27
Date of creation: 16 Nov 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/275

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Related research

Keywords: Capital flows; China; Emerging markets; Capital account liberalization; Capital flow liberalization; emerging market economies; dynamic panel data specification; simulations; capital adequacy; liberalization of capital flows; capital inflows; equity returns; capital adequacy ratios; capital outflows; capital markets; reer; capital movements; capital account convertibility; capital transactions; capital controls; net capital flows; openness to capital flows; border capital flows; real effective exchange rate; capital growth; speculative capital; equity prices; money laundering; inflation rate; short-term capital; real deposit rates; index options; capital accumulation; credit expansion;

References

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  1. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, Elsevier, vol. 87(1), pages 115-143, August.
  2. Henry, Peter B., 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Research Papers, Stanford University, Graduate School of Business 1974, Stanford University, Graduate School of Business.
  3. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, Elsevier, vol. 73(2), pages 223-250, November.
  4. Baltagi, Badi H. & Demetriades, Panicos O. & Law, Siong Hook, 2009. "Financial development and openness: Evidence from panel data," Journal of Development Economics, Elsevier, Elsevier, vol. 89(2), pages 285-296, July.
  5. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers, Centre for Economic Performance, LSE dp0007, Centre for Economic Performance, LSE.
  6. Martin Schindler, 2009. "Measuring Financial Integration: A New Data Set," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 222-238, April.
  7. Eichengreen, Barry & Gullapalli, Rachita & Panizza, Ugo, 2009. "Capital account liberalization, financial development and industry growth: a synthetic view," POLIS Working Papers, Institute of Public Policy and Public Choice - POLIS 128, Institute of Public Policy and Public Choice - POLIS.
  8. James Laurenceson & Kam Ki Tang, 2007. "Opening China's Capital Account: Modeling the Capital Flow Response," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 5(1), pages 1-18.
  9. Peter Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Discussion Papers, Stanford Institute for Economic Policy Research 07-004, Stanford Institute for Economic Policy Research.
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