Capital Account Liberalization for a Small, Open Economy
We survey the ongoing debate on pros and cons for an early and comprehensive liberalization of capital flows by emerging economies. We examine the main theoretical assumptions that would lead to positive effects on output growth and consumption volatility and reflect them with recent literature on market imperfections and information deficiencies. We find little evidence for a positive effect of free capital flows on economic growth and stability for emerging economies. We apply these main results to Vietnam as an example for an open emerging economy and discuss the main explanatory factors that may lead to negative impacts of an early and premature liberalization of capital flows. For small, open economies, absorption capacity for capital is limited. Excessive capital inflows might cause Dutch disease phenomena and asymmetric information might trigger an inefficient use of capital. In particular, we stress potential negative impacts of capital flows on the currency risk premium. Finally, we argue that for a partly dollarized economy as Vietnam a premature liberalization of capital flows might significantly increase financial sector instability. In conclusion, we emphasize the importance of a prudential sequencing of capital account liberalization and strong domestic institutions such as an independent central bank, proper financial regulation and supervision and macroeconomic stability as necessary pre-conditions.
|Date of creation:||2005|
|Date of revision:|
|Contact details of provider:|| Postal: 1309 East Tenth Street, Room 451, Bloomington, IN 47405-1701|
Web page: http://kelley.iu.edu/bepp/
More information through EDIRC
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.:
- Hali J. Edison & Michael W. Klein & Luca Antonio Ricci & Torsten Sløk, 2004.
"Capital Account Liberalization and Economic Performance: Survey and Synthesis,"
IMF Staff Papers,
Palgrave Macmillan, vol. 51(2), pages 2.
- Torsten M Sloek & Michael W Klein & Luca A Ricci & Hali J Edison, 2002. "Capital Account Liberalization and Economic Performance; Survey and Synthesis," IMF Working Papers 02/120, International Monetary Fund.
- Hali J. Edison & Michael W. Klein & Luca Ricci & Torsten Sloek, 2002. "Capital Account Liberalization and Economic Performance: Survey and Synthesis," NBER Working Papers 9100, National Bureau of Economic Research, Inc.
- Fiess, Norbert, 2003. "Capital flows, country risk, and contagion," Policy Research Working Paper Series 2943, The World Bank.
- Reinhart, Carmen & Kaminsky, Graciela, 2000.
"Las crisis gemelas: las causas de los problemas bancarios y de balanza de pagos
[The twin crises: Te causes of banking and balance of payments problems]," MPRA Paper 13842, University Library of Munich, Germany.
- Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
- Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
- Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
- Forbes, Kristin J., 2004.
"Capital Controls: Mud in the Wheels of Market Discipline,"
4454-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Kristin J. Forbes, 2004. "Capital Controls: Mud in the Wheels of Market Discipline," NBER Working Papers 10284, National Bureau of Economic Research, Inc.
- Reinhart, Carmen & Kaminsky, Graciela, 2008.
"The center and the periphery: The globalization of financial turmoil,"
14100, University Library of Munich, Germany.
- Graciela L. Kaminsky & Carmen Reinhart, 2003. "The Center and the Periphery: The Globalization of Financial Turmoil," NBER Working Papers 9479, National Bureau of Economic Research, Inc.
- Geert Bekaert & Campbell R. Harvey & Christian Lundblad, 2001.
"Does Financial Liberalization Spur Growth?,"
NBER Working Papers
8245, National Bureau of Economic Research, Inc.
- Michael W. Klein & Giovanni Olivei, 1999.
"Capital Account Liberalization, Financial Depth and Economic Growth,"
NBER Working Papers
7384, National Bureau of Economic Research, Inc.
- Michael W. Klein & Giovanni P. Olivei, 1999. "Capital account liberalization, financial depth, and economic growth," Working Papers 99-6, Federal Reserve Bank of Boston.
- Razin, A. & Sadka, E. & Yuen, C.-W., 1999.
"Excessive FDI Flows under Asymmetric Information,"
27-99, Tel Aviv.
- Arteta, Carlos & Eichengreen, Barry & Wyplosz, Charles, 2001.
"When Does Capital Account Liberalization Help More Than it Hurts?,"
CEPR Discussion Papers
2910, C.E.P.R. Discussion Papers.
- Carlos Arteta & Barry Eichengreen & Charles Wyplosz, 2001. "When Does Capital Account Liberalization Help More than It Hurts?," NBER Working Papers 8414, National Bureau of Economic Research, Inc.
- Andreas Hauskrecht & Nguyen Thanh Hai, 2004. "Dollarization in Viet Nam," Working Papers 2004-25, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
When requesting a correction, please mention this item's handle: RePEc:iuk:wpaper:2005-13. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rick Harbaugh)
If references are entirely missing, you can add them using this form.