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Volatile capital flows: Interactions between de jure and de facto financial liberalization


  • Rebecca Neumann

    () (University of Wisconsin - Milwaukee)

  • Ron Penl

    () (University of Wisconsin - Milwaukee)


Utilizing a panel data set for 13 developed economies, this paper examines the volatility of capital flows following the liberalization of financial markets. The paper focuses on the response of foreign direct investment, portfolio flows, and other debt flows to both financial liberalization and increased capital flows. The regression analysis examines how capital volatility is affected by the interaction between de jure financial liberalization (an index of liberalization) and de facto liberalization (the volume of capital flows). At average and high volumes of capital, financial liberalization is found to increase capital volatility as expected. At lower volumes of capital, financial liberalization reduces capital volatility, particularly for foreign direct investment and other flows, indicating there may be a threshold level of capital flows below which financial liberalization reduces volatility.

Suggested Citation

  • Rebecca Neumann & Ron Penl, 2008. "Volatile capital flows: Interactions between de jure and de facto financial liberalization," Economics Bulletin, AccessEcon, vol. 6(3), pages 1-10.
  • Handle: RePEc:ebl:ecbull:eb-07f30011

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    References listed on IDEAS

    1. 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, vol. 88(5), pages 829-853, October.
    2. Eswar S. Prasad & Raghuram G. Rajan & Arvind Subramanian, 2007. "Foreign Capital and Economic Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 153-230.
    3. Braumoeller, Bear F., 2004. "Hypothesis Testing and Multiplicative Interaction Terms," International Organization, Cambridge University Press, vol. 58(04), pages 807-820, October.
    4. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2006. "Growth volatility and financial liberalization," Journal of International Money and Finance, Elsevier, vol. 25(3), pages 370-403, April.
    5. Neumann, Rebecca M. & Penl, Ron & Tanku, Altin, 2009. "Volatility of capital flows and financial liberalization: Do specific flows respond differently?," International Review of Economics & Finance, Elsevier, vol. 18(3), pages 488-501, June.
    6. Brambor, Thomas & Clark, William Roberts & Golder, Matt, 2006. "Understanding Interaction Models: Improving Empirical Analyses," Political Analysis, Cambridge University Press, vol. 14(01), pages 63-82, December.
    7. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
    8. Wei, Shang-Jin, 2006. "Connecting two views on financial globalization: Can we make further progress?," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 459-481, December.
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    Cited by:

    1. Ben Salha Ousama & Bouazizi Tarek & Aloui Chaker, 2012. "Financial Liberalization, Banking Crises and Economic Growth: The Case of South Mediterranean Countries," Global Economy Journal, De Gruyter, vol. 12(3), pages 1-22, September.

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    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance


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