Working Paper: CEPR ID: DP2910
Authors: Carlos Arteta; Barry Eichengreen; Charles Wyplosz
Abstract: In this Paper we reconsider the evidence on capital account liberalization and growth. While we find indications of a positive association, the effects vary with time, with how capital account liberalization is measured, and with how the relationship is estimated. The evidence that the effects of capital account liberalization are stronger in high-income countries is similarly fragile. There is some evidence that the positive growth effects of liberalization are stronger in countries with strong institutions, as measured by standard indicators of the rule of law, but only weak evidence that the benefits grow with a country?s financial depth and development. We find more evidence of a correlation between capital account liberalization and growth when we allow the effect to vary with other dimensions of openness. There are two interpretations of this finding, one in terms of the sequencing of trade and financial liberalization, the other in terms of the need to eliminate major macroeconomic imbalances before opening the capital account. By and large our results support the second interpretation.
Keywords: capital; account liberalization; growth
JEL Codes: F10; F20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital account liberalization (F32) | economic growth (O49) |
| capital account liberalization + macroeconomic imbalances (F32) | economic growth (O49) |
| sequencing of reforms (P21) | capital account liberalization effects (F32) |
| capital account liberalization + other dimensions of openness (F30) | economic growth (O49) |