A welfare analysis of capital account liberalization

Arbeitspapier

We develop a model of a small open economy with credit market frictions of the Holmstrom-Tirole type to analyze the consequences of capital account liberalization. We show that financial opening facilitates the inflows of cheap foreign funds and improves production efficiency. Reforms increasing labor market flexibility can further improve such efficiency gains. However, capital account liberalization also has important distributional consequences. Specifically, it may be impossible to use public transfers to fully compensate the loss of those negatively affected by capital account liberalization. This explains why financial opening often meets fierce opposition even though it leads to efficiency gains for the economy as a whole. From a practical perspective, capital controls should be lifted gradually for a smooth transition.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ZEI Working Paper ; No. B 01-2006

Classification and Topics

• Classification: Wirtschaft ; Business Fluctuations; Cycles ; Financial Markets and the Macroeconomy ; Open Economy Macroeconomics
• Subject: Capital account liberalization ; Capital controls ; Financial frictions ; Macroeconomic fluctuations ; Asset price overshooting ; Kapitalmarktliberalisierung ; Kapitalverkehrspolitik ; Wohlfahrtseffekt ; Kleines-offenes-Land ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): von Hagen, Jürgen ; Zhang, Haiping
• Event: Veröffentlichung
• (who): Rheinische Friedrich-Wilhelms-Universität Bonn, Zentrum für Europäische Integrationsforschung (ZEI)
• (where): Bonn
• (when): 2006

Further information

• Handle: http://hdl.handle.net/10419/39551
• Last update: 10.03.2025, 11:44 AM CET