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Opening the capital account : a survey of issues and results

  • Hanson, James A.
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    The increase in trade, the increasing internationalization of production and the improvements in communications, together with the legalization of foreign currency instruments in a growing number of countries, have led to a de facto liberalization of the capital account. In line with the greater reliance on open goods markets and a de facto opening of the capital account, developing country governments are raising questions about fully opening the capital account. As a background to answering these questions, this paper surveys the existing literature on opening up domestic capital markets, much of which was written prior to the debt crisis. This survey begins with a brief summary of the costs and benefits of capital account liberalization, paying particular attention to the issue of the loss of policy effectiveness and noting the new theories of capital flows based on international portfolio diversification of risky assets, which raise the possibility of benefits from capital account liberalization that are not linked solely to higher investment rates. The survey then reexamines the evidence on the results of open capital accounts. Finally, the survey revisits the question of sequencing the liberalization of the current and capital accounts, to provide a background for programs to liberalize the capital account.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 901.

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    Date of creation: 31 May 1992
    Date of revision:
    Handle: RePEc:wbk:wbrwps:901
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    8. Sebastian Edwards & Mohsin S. Khan, 1985. "Interest Rate Determination in Developing Countries: A Conceptual Framework (Détermination du taux d'intérêt dans les pays en développement: cadre théorique) (Determinación de los tipos de inter," IMF Staff Papers, Palgrave Macmillan, vol. 32(3), pages 377-403, September.
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    11. 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 829-53, October.
    12. Frenkel, Jacob A & Levich, Richard M, 1975. "Covered Interest Arbitrage: Unexploited Profits?," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 325-38, April.
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