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Adjusting to capital liberalization

Author

Listed:
  • Aoki, Kosuke
  • Benigno, Gianluca
  • Kiyotaki, Nobuhiro

Abstract

We study theoretically how an economy adjusts to liberalization of interna-tional financial transaction. We consider an economy in which debtors do not repay unless the debts are secured by collateral, and collateralizable assets for international borrowing are more restricted than domestic borrowing. We exam- ine how the adjustment to capital liberalization depends upon the domestic and international collateral constraints. We show that, with an intermediate level of domestic collateral constraint, capital liberalization leads to capital out‡ow, im- provement of TFP, and transitional loss of wage and employment. Government policy can mitigate the loss of workers at the cost of prolonging the transition, but cannot eliminate the loss without halting the transition.

Suggested Citation

  • Aoki, Kosuke & Benigno, Gianluca & Kiyotaki, Nobuhiro, 2006. "Adjusting to capital liberalization," LSE Research Online Documents on Economics 3167, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:3167
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    File URL: http://eprints.lse.ac.uk/3167/
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    References listed on IDEAS

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    1. John Hills, 2003. "Inclusion or Insurance? National Insurance and the future of the contributory principle," CASE Papers case68, Centre for Analysis of Social Exclusion, LSE.
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    Cited by:

    1. Aoki, Kosuke & Nikolov, Kalin, 2015. "Bubbles, banks and financial stability," Journal of Monetary Economics, Elsevier, vol. 74(C), pages 33-51.
    2. Chen, Jinzhao & Quang, Thérèse, 2014. "The impact of international financial integration on economic growth: New evidence on threshold effects," Economic Modelling, Elsevier, vol. 42(C), pages 475-489.
    3. Vollrath, Dietrich, 2008. "Agrarian Structure and Endogenous Financial System Development," MPRA Paper 11538, University Library of Munich, Germany.
    4. Jurgen von Hageny & Haiping Zhang, 2007. "A Welfare Analysis of Capital Liberalization," Macroeconomics Working Papers 22489, East Asian Bureau of Economic Research.
    5. Pol Antràs & Ricardo J. Caballero, 2009. "Trade and Capital Flows: A Financial Frictions Perspective," Journal of Political Economy, University of Chicago Press, vol. 117(4), pages 701-744, August.
    6. Jürgen von Hagen & Haiping Zhang, 2008. "A Welfare Analysis of Capital Account Liberalization," Review of International Economics, Wiley Blackwell, vol. 16(3), pages 576-590, August.
    7. Haiping Zhang & Jurgen von Hagen, 2007. "Financial Development and International Capital Flows," Working Papers 16-2007, Singapore Management University, School of Economics.
    8. Jiandong Ju & Shang-Jin Wei, 2010. "Domestic Institutions and the Bypass Effect of Financial Globalization," American Economic Journal: Economic Policy, American Economic Association, vol. 2(4), pages 173-204, November.
    9. Saygili Meryem, 2013. "Financial Liberalization, Limited Contract Enforcement and Productivity," Journal of Globalization and Development, De Gruyter, vol. 4(1), pages 95-130, August.

    More about this item

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

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