Capital Account Liberalization: Theory, Evidence, and Speculation

Author: Henry, Peter Blair

Source: Journal of Economic Literature, Volume 45, Number 4, December 2007 , pp. 887-935(49)

Publisher: American Economic Association

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Abstract:

Research on the macroeconomic impact of capital account liberalization finds 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. Most 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.

Document Type: Research article

DOI: 10.1257/002205107783216556

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