Working Paper: NBER ID: w11112
Authors: Michael W. Klein
Abstract: This paper shows that the effect of capital account liberalization on growth depends upon the environment in which that policy occurs. A theoretical model demonstrates the possibility of an inverted-U shaped relationship between the responsiveness of growth to capital account liberalization and institutional quality. Three empirical specifications based on the model are estimated using a panel of 71 countries. Estimates of all three specifications support the hypothesis of a non-monotonic interaction between the responsiveness of growth to capital account liberalization and institutional quality, with about one-quarter of the countries, those with better (but not the best) institutions exhibiting a statistically significant and economically meaningful effect of capital account openness on economic growth.
Keywords: capital account liberalization; institutional quality; economic growth
JEL Codes: F32; F33; F36
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) |
| Institutional quality (I24) | Responsiveness of growth to capital account liberalization (F32) |
| Institutional quality (I24) | Responsiveness of growth to capital account liberalization (after a certain point) (F32) |
| Institutional quality moderates the effect of capital account liberalization on economic growth (O43) | Economic growth (O49) |