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Does Capital Account Liberalization Discipline Budget Deficit?

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  • Woochan Kim

Abstract

The paper investigates whether free capital mobility leads a government to tighten its budget deficit for fear of being penalized from the international capital market. The author tests the hypothesis using three-stage least squares (3SLS), which can control for the endogenous nature of capital account liberalization. Even the conservative measure shows that, if capital account liberalization were exogenously imposed, ceteris paribus , government budget deficit would be reduced by 2.275% of GDP. Furthermore, 3SLS results show that this disciplinary effect is stronger for countries under a fixed exchange rate regime or for countries with weak central bank independence. The disciplinary effect is also found to be stronger in more recent periods-the 1990s-during which capital market integration has been most prevalent. Copyright Blackwell Publishing Ltd 2003.

Suggested Citation

  • Woochan Kim, 2003. "Does Capital Account Liberalization Discipline Budget Deficit?," Review of International Economics, Wiley Blackwell, vol. 11(5), pages 830-844, November.
  • Handle: RePEc:bla:reviec:v:11:y:2003:i:5:p:830-844
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    References listed on IDEAS

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    1. Donald J Mathieson & Liliana Rojas-Suárez, 1992. "Liberalization of the Capital Account; Experiences and Issues," IMF Working Papers 92/46, International Monetary Fund.
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    Cited by:

    1. M Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 8-62, April.
    2. Zhang, Chenying, 2010. "Sterilization in China: Effectiveness and Cost," Working Papers 10-29, University of Pennsylvania, Wharton School, Weiss Center.
    3. Winston Moore, 2014. "Managing The Process Of Removing Capital Controls: What Does The Literature Suggest?," Journal of Economic Surveys, Wiley Blackwell, vol. 28(2), pages 209-237, April.
    4. Mirdala, Rajmund & Svrčeková, Aneta & Semančíková, Jozefína, 2015. "On the Relationship between Financial Integration, Financial Liberalization and Macroeconomic Volatility," MPRA Paper 66143, University Library of Munich, Germany.
    5. Luca Agnello & Ricardo M. Sousa, 2013. "Political, Institutional, and Economic Factors Underlying Deficit Volatility," Review of International Economics, Wiley Blackwell, vol. 21(4), pages 719-732, September.
    6. William MILES, 2011. "Financial Globalization And Inflation In Developing Countries: A Reappraisal," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 11(1).
    7. Gábor, Tamás & Kiss, Gábor Dávid & Kovács, Péter, 2012. "A monetáris sterilizáció hatékonysága és költségei Kínában
      [The efficiency and costs of monetary sterilization in China]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(2), pages 164-188.
    8. Ila Patnaik & Abhijit Sen Gupta & Ajay Shah, 2012. "Determinants of Trade Misinvoicing," Open Economies Review, Springer, vol. 23(5), pages 891-910, November.
    9. Davide Furceri & Aleksandra Zdzienicka, 2012. "Financial Integration and Fiscal Policy," Open Economies Review, Springer, vol. 23(5), pages 805-822, November.
    10. Lekshmi Nair, 2012. "Policy Disciplining Effect of Capital Account Openness in India," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 19(1), pages 43-57, September.
    11. Shang-Jin Wei & Irina Tytell, 2004. "Does Financial Globalization Induce Better Macroeconomic Policies?," IMF Working Papers 04/84, International Monetary Fund.
    12. Richard N. Cooper, 1999. "Exchange rate choices," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 43(Jun), pages 99-136.
    13. Chowdhury, Mohammad Tarequl Hasan & Bhattacharya, Prasad Sankar & Mallick, Debdulal & Ulubaşoğlu, Mehmet Ali, 2016. "Exchange rate regimes and fiscal discipline: The role of trade openness," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 106-128.
    14. Sen Gupta, Abhijit, 2010. "Management of International Capital Flows: The Indian Experience," MPRA Paper 23747, University Library of Munich, Germany.
    15. Gábor, Tamás, 2012. "China's monetary sterilization and it's economical relationship with the European Union," MPRA Paper 40362, University Library of Munich, Germany.
    16. Abhijit Sen Gupta, 2010. "Robust monetary policies in small open economies," Oxford Economic Papers, Oxford University Press, vol. 62(2), pages 350-373, April.

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