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Opening the capital account : a survey of issues and results

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  • Hanson, James A.
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    Abstract

    The increase in trade, the increasing internationalization of production and the improvements in communications, together with the legalization of foreign currency instruments in a growing number of countries, have led to a de facto liberalization of the capital account. In line with the greater reliance on open goods markets and a de facto opening of the capital account, developing country governments are raising questions about fully opening the capital account. As a background to answering these questions, this paper surveys the existing literature on opening up domestic capital markets, much of which was written prior to the debt crisis. This survey begins with a brief summary of the costs and benefits of capital account liberalization, paying particular attention to the issue of the loss of policy effectiveness and noting the new theories of capital flows based on international portfolio diversification of risky assets, which raise the possibility of benefits from capital account liberalization that are not linked solely to higher investment rates. The survey then reexamines the evidence on the results of open capital accounts. Finally, the survey revisits the question of sequencing the liberalization of the current and capital accounts, to provide a background for programs to liberalize the capital account.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 901.

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    Date of creation: 31 May 1992
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    Handle: RePEc:wbk:wbrwps:901

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    Keywords: International Terrorism&Counterterrorism; Economic Theory&Research; Banks&Banking Reform; Environmental Economics&Policies; Macroeconomic Management;

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    1. Michael P. Dooley, 1988. "Capital Flight: A Response to Differences in Financial Risks," IMF Staff Papers, Palgrave Macmillan, vol. 35(3), pages 422-436, September.
    2. Brunner, Karl & Meltzer, Allan H., 1982. "Economic policy in a world of change," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 17(1), pages 1-6, January.
    3. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
    4. Sebastian Edwards & Mohsin S. Khan, 1985. "Interest Rate Determination in Developing Countries: A Conceptual Framework (Détermination du taux d'intérêt dans les pays en développement: cadre théorique) (Determinación de los ti," IMF Staff Papers, Palgrave Macmillan, vol. 32(3), pages 377-403, September.
    5. Fischer, Stanley & Frenkel, Jacob A, 1974. "Interest Rate Equalization and Patterns of Production, Trade and Consumption in a Two-country Growth Model," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 50(132), pages 555-80, December.
    6. Hanson, James A, 1974. "Optimal International Borrowing and Lending," American Economic Review, American Economic Association, American Economic Association, vol. 64(4), pages 616-30, September.
    7. Lars E.O. Svensson, 1987. "Trade in Risky Assets," NBER Working Papers 2403, National Bureau of Economic Research, Inc.
    8. Frenkel, Jacob A & Levich, Richard M, 1975. "Covered Interest Arbitrage: Unexploited Profits?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(2), pages 325-38, April.
    9. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(5), pages 829-53, October.
    10. Daniel Gros, 1988. "Dual Exchange Rates in the Presence of Incomplete Market Separation: Long-Run Effectiveness and Policy Implications," IMF Staff Papers, Palgrave Macmillan, vol. 35(3), pages 437-460, September.
    11. R. Dornbusch, 1975. "Exchange Rate Dynamics," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 167, Massachusetts Institute of Technology (MIT), Department of Economics.
    12. Murphy, Robert G., 1984. "Capital mobility and the relationship between saving and investment rates in OECD countries," Journal of International Money and Finance, Elsevier, Elsevier, vol. 3(3), pages 327-342, December.
    13. Guillermo Ortiz, 1983. "Dollarization in Mexico: Causes and Consequences," NBER Chapters, in: Financial Policies and the World Capital Market: The Problem of Latin American Countries, pages 71-106 National Bureau of Economic Research, Inc.
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    Cited by:
    1. Bosworth, B. & Collins, S.M. & Chen, Y.C., 1995. "Accounting for Differences in Economic Growth," Papers, Brookings Institution - Working Papers 115, Brookings Institution - Working Papers.
    2. Louis Kasekende & Damoni Kitabire & Matthew Martin, 1998. "Capital Inflows and Macroeconomic Policy in Sub-Saharan Africa," Macroeconomics, EconWPA 9809005, EconWPA.
    3. Claessens, Stijn, 1993. "Equity portfolio investment in developing countries : a literature survey," Policy Research Working Paper Series 1089, The World Bank.
    4. Glaessner, Thomas Charles & Oks, Daniel, 1998. "NAFTA, capital mobility, and Mexico's financial system," Policy Research Working Paper Series 1984, The World Bank.
    5. Raúl Labán & Felipe Larraín, 1997. "El Retorno de los Capitales Privados a Chile en los Noventa: Causas, Efectos y Reacciones de Política," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 34(103), pages 339-362.
    6. Claessens, Stijn & Varangis, Panos & DEC, 1994. "Oil price instability, hedging, and an oil stabilization fund : the case of Venezuela," Policy Research Working Paper Series 1290, The World Bank.

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