Abstract for:

Adjusting to Capital Account Liberalization

Kosuke  Aoki,  Gianluca  Benigno,  Nobuhiro  Kiyotaki,  October 2010
Paper No' CEPDP1014: | Full paper

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Keywords: credit frictions; capital account liberalization

JEL Classification: F32

Is hard copy/paper copy available? YES - Paper Copy Still In Print.

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This Paper is published under the following series: CEP Discussion Papers

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Abstract:

We study theoretically how the adjustment to liberalization of international financial transaction depends upon the degree of domestic financial development. Using a model with domestic and international borrowing constraints, we show that, when the domestic financial system is underdeveloped, capital account liberalization is not necessarily beneficial because TFP stagnates in the long-run or employment decreases in the short-run. Government policy, including allowing foreign direct investment, can mitigate the possible loss of employment, but cannot eliminate it unless the domestic financial system is improved.