Working Paper: NBER ID: w9427
Authors: Barry Eichengreen; David Leblang
Abstract: Much ink has been spilled over the connections between capital account liberalization and growth. One reason that previous studies have been inconclusive, we show, is their failure to account for the impact of crises on growth and for the capacity of controls to limit those disruptive output effects. Accounting for these influences, it appears that controls influence macroeconomic performance through two channels, directly (what we think of as their positive impact on resource allocation and efficiency) and indirectly (by limiting the disruptive effects of crises at home and abroad). Because these influences work in opposite directions, it is not surprising that previous studies, in failing to distinguish between them, have been unable to agree whether the effect of controls tilts one way or the other. And because vulnerability to crises varies across countries and with the structure and performance of the international financial system, it is not surprising that the effects of capital account liberalization on growth are contingent and context specific. We document these patterns using two entirely different data sets: a panel of historical data for 21 countries covering the period 1880-1997, and a wider panel for the post-1971 period like that employed in other recent studies.
Keywords: capital account liberalization; economic growth; financial crises; resource allocation
JEL Codes: F3
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 (F32) | efficient allocation of resources (D61) |
| financial instability (F65) | detrimental effects of capital account liberalization (F32) |
| capital controls (F38) | faster growth during financial instability (O16) |
| capital account openness (F30) | positive effect on growth (O40) |