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Journal of Economic Literature: Vol. 45 No. 4 (December 2007)

JEL Volume. 45, Issue 4 | Next Article

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Capital Account Liberalization: Theory, Evidence, and Speculation

Article Citation

Henry, Peter Blair. 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation." Journal of Economic Literature, 45(4): 887-935.

DOI: 10.1257/jel.45.4.887

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.

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Authors

Henry, Peter Blair

JEL Classifications

E44: Financial Markets and the Macroeconomy
F32: Current Account Adjustment; Short-term Capital Movements
O41: One, Two, and Multisector Growth Models