Title

Adjusting to Capital Account Liberalization

Author(s)

Kosuke Aoki Kosuke Aoki (London School of Economics)

Gianluca Benigno Gianluca Benigno (London School of Economics)

Nobuhiro Kiyotaki Nobuhiro Kiyotaki (Princeton University)

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.

Creation Date

2009-06

Section URL ID

Paper Number

2009-2

URL

http://www.princeton.edu/~kiyotaki/papers/ABKJuly09.pdf

File Function

Jel

F32

Keyword(s)

capital account liberalization, credit frictions, domestic financial markets

Suppress

false

Series

13