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Capital Account Liberalization: Theory, Evidence, and Speculation

Author

Listed:
  • Peter Henry

    (Graduate School of Business, Stanford University)

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. 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 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.

Suggested Citation

  • Peter Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Discussion Papers 07-004, Stanford Institute for Economic Policy Research.
    • Handle: RePEc:sip:dpaper:07-004
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    Keywords

    capital account liberalization; macroeconomic impact; cost of capital; investment; economic growth;
    All these keywords.

    JEL classification:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts

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