Working Paper: NBER ID: w2487
Authors: Meir Kohn; Nancy Marion
Abstract: This paper reexamines the view that opening capital markets must have long-run benefits. The analysis shows that the desirability of opening a country's capital markets depends on the nature of the technology assumed. Models of knowledge-based growth predict that changes which alter the economy's level of production will also affect the economy's growth rate and hence the welfare of future generations. Standard neoclassical growth models imply no such effects on growth or welfare. If production does involve an important element of learning by doing, inference from the standard models may be seriously misleading. In particular, opening capital markets does not necessarily improve welfare for the nation or for the world as a whole.
Keywords: knowledge-based growth; capital markets; welfare implications; interest rates
JEL Codes: O3; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| knowledge-based growth models (O41) | welfare implications (I30) |
| capital market opening (G10) | welfare (I38) |
| world interest rate < domestic autarky rate (E43) | capital market opening enhances welfare (G10) |
| world interest rate > domestic autarky rate (E43) | capital market opening may decrease welfare (G10) |
| current production increases knowledge stock (O49) | future productivity (O49) |
| capital market policies (G18) | long-term economic outcomes (F69) |