A Welfare Analysis of Capital Account Liberalization

We develop a model of a small open economy with credit market frictions to analyze the consequences of capital account liberalization. We show that financial opening facilitates the inflows of cheap foreign funds and improves production efficiency. Reforms increasing labor market exibility can furth...

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Main Authors: von Hagen, Jürgen, ZHANG, Haiping
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2008
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Online Access:https://ink.library.smu.edu.sg/soe_research/423
https://ink.library.smu.edu.sg/context/soe_research/article/1422/viewcontent/RIE_vonHagen_Zhang.pdf
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spelling sg-smu-ink.soe_research-14222019-04-27T05:09:51Z A Welfare Analysis of Capital Account Liberalization von Hagen, Jürgen ZHANG, Haiping We develop a model of a small open economy with credit market frictions to analyze the consequences of capital account liberalization. We show that financial opening facilitates the inflows of cheap foreign funds and improves production efficiency. Reforms increasing labor market exibility can further improve such efficiency gains. However, capital account liberalization also has important distributional consequences. Specifically, it may be impossible to use public transfers to fully compensate the loss of those negatively affected by capital account liberalization. This explains why financial opening often meets fierce opposition even though it leads to efficiency gains for the economy as a whole. From a practical perspective, capital controls should be lifted gradually for a smooth transition. 2008-08-01T07:00:00Z text application/pdf https://ink.library.smu.edu.sg/soe_research/423 info:doi/10.1111/j.1467-9396.2008.00746.x https://ink.library.smu.edu.sg/context/soe_research/article/1422/viewcontent/RIE_vonHagen_Zhang.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection School Of Economics eng Institutional Knowledge at Singapore Management University capital account liberalization capital controls financial frictions macroeconomic fluctuations asset price overshooting Economics International Economics
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic capital account liberalization
capital controls
financial frictions
macroeconomic fluctuations
asset price overshooting
Economics
International Economics
spellingShingle capital account liberalization
capital controls
financial frictions
macroeconomic fluctuations
asset price overshooting
Economics
International Economics
von Hagen, Jürgen
ZHANG, Haiping
A Welfare Analysis of Capital Account Liberalization
description We develop a model of a small open economy with credit market frictions to analyze the consequences of capital account liberalization. We show that financial opening facilitates the inflows of cheap foreign funds and improves production efficiency. Reforms increasing labor market exibility can further improve such efficiency gains. However, capital account liberalization also has important distributional consequences. Specifically, it may be impossible to use public transfers to fully compensate the loss of those negatively affected by capital account liberalization. This explains why financial opening often meets fierce opposition even though it leads to efficiency gains for the economy as a whole. From a practical perspective, capital controls should be lifted gradually for a smooth transition.
format text
author von Hagen, Jürgen
ZHANG, Haiping
author_facet von Hagen, Jürgen
ZHANG, Haiping
author_sort von Hagen, Jürgen
title A Welfare Analysis of Capital Account Liberalization
title_short A Welfare Analysis of Capital Account Liberalization
title_full A Welfare Analysis of Capital Account Liberalization
title_fullStr A Welfare Analysis of Capital Account Liberalization
title_full_unstemmed A Welfare Analysis of Capital Account Liberalization
title_sort welfare analysis of capital account liberalization
publisher Institutional Knowledge at Singapore Management University
publishDate 2008
url https://ink.library.smu.edu.sg/soe_research/423
https://ink.library.smu.edu.sg/context/soe_research/article/1422/viewcontent/RIE_vonHagen_Zhang.pdf
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