Working Paper: NBER ID: w14658
Authors: Eswar S. Prasad
Abstract: In this paper, I analyze India's approach to capital account liberalization through the lens of the new literature on financial globalization. India's authorities have taken a cautious and calibrated path to capital account opening, which has served the economy well in terms of reducing its vulnerability to crises. By now, the capital account has become quite open and reversing this is not a viable option. Moreover, the remaining capital controls are rapidly becoming ineffective, making the debate about capital controls rather moot. Managing de facto financial integration into international capital markets and aligning domestic macroeconomic policies in a manner that maximizes the indirect benefits and reduces the risks is the key challenge now facing India's policymakers on this front.
Keywords: capital account liberalization; financial globalization; India; macroeconomic policy
JEL Codes: F3; F4; O2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Cautious and calibrated approach to capital account opening (F32) | Reduced vulnerability to financial crises (F65) |
| Gradual integration into international capital markets (F30) | Enhanced overall economic welfare (D69) |
| Remaining capital controls becoming ineffective (F38) | Changing dynamics of financial integration (F30) |
| Cautious approach to capital account opening (F32) | Improved corporate governance and financial market development (G38) |
| Weak initial conditions (C62) | Worse outcomes from financial integration (F65) |