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Opposition to capital market opening

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  • Engler, Philipp
  • Wulff, Alexander

Abstract

We employ a neoclassical growth model to assess the impact of financial liberalization in a developing country on capital owners` and workers` consumption and welfare. We find in a baseline calibration for an average non-OECD country that capitalists suffer a 42 percent reduction in permanent consumption because capital inflows reduce their return to capital while workers gain 8 percent of permanent consumption because capital inflows increase wages. These huge gross impacts contrast with the small positive net effect found in a neoclassical represent agent model by Gourinchas and Jeanne (2006). We further show that the result for capitalists is insensitive to enhanced productivity catch-up processes induced by capital inflows. Our findings can help explain why poorer countries tend to be less financially open as capitalists` losses are largest for countries with the lowest capital stocks, inducing strong opposition to capital market opening. --

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Bibliographic Info

Paper provided by Free University Berlin, School of Business & Economics in its series Discussion Papers with number 2011/17.

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Date of creation: 2011
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Handle: RePEc:zbw:fubsbe:201117

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Keywords: Capital flows; international financial integration; growth; neoclassical model; heterogenous agents;

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  1. Theodore H. Moran & Edward M. Graham & Magnus Blomstrom, 2005. "Does Foreign Direct Investment Promote Development?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 3810.
  2. Pablo M. Pinto & Santiago M. Pinto, 2008. "The Politics Of Investment Partisanship: And The Sectoral Allocation Of Foreign Direct Investment," Economics and Politics, Wiley Blackwell, vol. 20(2), pages 216-254, 06.
  3. Indrit Hoxha & Sebnem Kalemli-Ozcan & Dietrich Vollrath, 2009. "How Big are the Gains from International Financial Integration?," NBER Working Papers 14636, National Bureau of Economic Research, Inc.
  4. Fernando A. Broner & Jaume Ventura, 2010. "Rethinking the Effects of Financial Liberalization," NBER Working Papers 16640, National Bureau of Economic Research, Inc.
  5. Luca Antonio Ricci & Thierry Tressel & Dennis B. S. Reinhardt, 2010. "International Capital Flows and Development," IMF Working Papers 10/235, International Monetary Fund.
  6. Ben Gardiner & Ron Martin & Tyler Peter, 2004. "Competitiveness, Productivity and Economic Growth across the European Regions," ERSA conference papers ersa04p333, European Regional Science Association.
  7. Crespo Jorge & Martín Carmela & Velázquez Francisco J, 2004. "The Role of International Technology Spillovers in the Economic Growth of the OECD Countries," Global Economy Journal, De Gruyter, vol. 4(2), pages 1-20, December.
  8. Aizenman, Joshua, 2005. "Opposition to FDI and financial shocks," Journal of Development Economics, Elsevier, vol. 77(2), pages 467-476, August.
  9. An, Galina & Iyigun, Murat F., 2004. "The export skill content, learning by exporting and economic growth," Economics Letters, Elsevier, vol. 84(1), pages 29-34, July.
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