Working Paper: NBER ID: w12698
Authors: Peter Blair Henry
Abstract: Writings on the macroeconomic impact of capital account liberalization find few, if any, robust effects of liberalization on real variables. In contrast to the prevailing wisdom, I argue that the textbook theory of liberalization holds up quite well to a critical reading of this literature. The lion's share of papers that find no effect of liberalization on real variables tell us nothing about the empirical validity of the theory, because they do not really test it. This paper explains why it is that most studies do not really address the theory they set out to test. It also discusses what is necessary to test the theory and examines papers that have done so. Studies that actually test the theory show that liberalization has significant effects on the cost of capital, investment, and economic growth.
Keywords: Capital account liberalization; Economic growth; Investment; Neoclassical growth model
JEL Codes: E6; F3; F4; G15; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital account liberalization (F32) | temporary increase in GDP growth rates (O49) |
| capital account liberalization (F32) | decrease in the cost of capital (G31) |
| decrease in the cost of capital (G31) | increase in investment (E22) |
| increase in investment (E22) | temporary increase in GDP growth rates (O49) |
| liberalization episodes (E65) | temporary growth boosts (O40) |
| stock market liberalizations (G18) | increase in growth rate of capital stock (O41) |