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Capital Account Liberalization: Theory, Evidence, and Speculation

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Publication Date: January 2007

Publisher(s): Brookings Institution

Author(s): Peter Blair Henry

Topic: Economics (Economic theory)

Keywords: emerging markets; globalization; capital account liberalization; global economics

Type: Report

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.