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Opposition to capital market opening

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  • Engler, Philipp
  • Wulff, Alexander

Abstract

We employ a neoclassical growth model to assess the impact of financial liberalization in a developing country on capital owners` and workers` consumption and welfare. We find in a baseline calibration for an average non-OECD country that capitalists suffer a 42 percent reduction in permanent consumption because capital inflows reduce their return to capital while workers gain 8 percent of permanent consumption because capital inflows increase wages. These huge gross impacts contrast with the small positive net effect found in a neoclassical represent agent model by Gourinchas and Jeanne (2006). We further show that the result for capitalists is insensitive to enhanced productivity catch-up processes induced by capital inflows. Our findings can help explain why poorer countries tend to be less financially open as capitalists` losses are largest for countries with the lowest capital stocks, inducing strong opposition to capital market opening.

Suggested Citation

  • Engler, Philipp & Wulff, Alexander, 2011. "Opposition to capital market opening," Discussion Papers 2011/17, Free University Berlin, School of Business & Economics.
  • Handle: RePEc:zbw:fubsbe:201117
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    References listed on IDEAS

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    1. Ben Gardiner & Ron Martin & Tyler Peter, 2004. "Competitiveness, Productivity and Economic Growth across the European Regions," ERSA conference papers ersa04p333, European Regional Science Association.
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    More about this item

    Keywords

    Capital flows; international financial integration; growth; neoclassical model; heterogenous agents;

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F3 - International Economics - - International Finance
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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