Open Capital Account: Concrete Wealth or Paper Wealth
AbstractEmpirical evidence shows that capital inflows are often used by developing countries to finance excessive consumption. The existing literature explains these phenomena as resulting from institutional imperfections. In contrast, we argue that they can be fundamental outcomes of open capital account, under which ineffectiveness in using foreign savings for investments tends to result in capital inflows being channeled to consumption through wealth effect. Our analysis shows that, while risk aversion causes low investment elasticity and hence reduces the total benefit of capital account liberalization for society over time, it nevertheless tends to increase the benefit enjoyed by current generations and hence drive consumption booms. We show that the proportion of capital inflows used for financing consumption is negatively correlated with investment elasticity. We show that a positive yet uncertain future productivity shock is likely to cause consumption booms because of sluggish investment reactions. Our analysis shows that, the greater the expected future productivity is; or the greater the uncertainty is; the stronger the consumption booms will be. (JEL F21 F32 F41 F43)
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by EconWPA in its series International Finance with number 0401002.
Length: 36 pages
Date of creation: 14 Jan 2004
Date of revision:
Note: Type of Document - pdf; prepared on Win2000; pages: 36; figures: 3
Contact details of provider:
Web page: http://22.214.171.124
open capital account; wealth effect; consumption boom; investment elasticity;
Find related papers by JEL classification:
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
This paper has been announced in the following NEP Reports:
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.:
- Helpman, Elhanan & Razin, Assaf, 1987.
"Exchange Rate Management: Intertemporal Tradeoffs,"
American Economic Review,
American Economic Association, vol. 77(1), pages 107-23, March.
- Andrew B. Abel, 2002.
"The Effects of a Baby Boom on Stock Prices and Capital Accumulation in the Presence of Social Security,"
NBER Working Papers
9210, National Bureau of Economic Research, Inc.
- Andrew B. Abel, 2003. "The Effects of a Baby Boom on Stock Prices and Capital Accumulation in the Presence of Social Security," Econometrica, Econometric Society, vol. 71(2), pages 551-578, March.
- Andrew B. Abel, 2002. "The effects of a baby boom on stock prices and capital accumulation in the presence of Social Security," Working Papers 03-2, Federal Reserve Bank of Philadelphia.
- repec:idb:brikps:6427 is not listed on IDEAS
- Blanchard, Olivier J, 1985.
"Debt, Deficits, and Finite Horizons,"
Journal of Political Economy,
University of Chicago Press, vol. 93(2), pages 223-47, April.
- Michael Gavin & Ricardo Hausmann & Ernesto Talvi, 1997. "Saving Behavior in Latin America: Overview and Policy Issues," Research Department Publications 4070, Inter-American Development Bank, Research Department.
- Matsuyama, Kiminori, 1987. "Current account dynamics in a finite horizon model," Journal of International Economics, Elsevier, vol. 23(3-4), pages 299-313, November.
- Helmut Reisen, 1996. "Net capital inflows: how much to accept, how much to resist?," Proceedings, Federal Reserve Bank of San Francisco, pages 289-321.
- Nazmi, Nader, 1997. "Exchange rate-based stabilization in Latin America," World Development, Elsevier, vol. 25(4), pages 519-535, January.
- Bernanke, Ben S, 1983.
"Irreversibility, Uncertainty, and Cyclical Investment,"
The Quarterly Journal of Economics,
MIT Press, vol. 98(1), pages 85-106, February.
- Ben S. Bernanke, 1980. "Irreversibility, Uncertainty, and Cyclical Investment," NBER Working Papers 0502, National Bureau of Economic Research, Inc.
- Junning Cai, 2003. "Fundamental Paper Wealth and Monetary Policy," Macroeconomics 0309001, EconWPA.
- Calvo, Guillermo A, 1986. "Temporary Stabilization: Predetermined Exchange Rates," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1319-29, December.
- Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1996.
"Inflows of Capital to Developing Countries in the 1990s,"
Journal of Economic Perspectives,
American Economic Association, vol. 10(2), pages 123-139, Spring.
- Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1996. "Inflows of capital to developing countries in the 1990s," MPRA Paper 13707, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).
If references are entirely missing, you can add them using this form.