Financial Openness and Growth: Short-Run Gain, Long-Run Pain?

43 Pages Posted: 10 Sep 2004

See all articles by Marcel Fratzscher

Marcel Fratzscher

DIW Berlin; Centre for Economic Policy Research (CEPR)

Matthieu Bussière

Banque de France

Date Written: April 2004

Abstract

No empirical evidence has yet emerged for the existence of a robust positive relationship between financial openness and economic growth. This paper argues that a key reason for the elusive evidence is the presence of a time-varying relationship between openness and growth over time: countries tend to gain in the short-term, immediately following capital account liberalisation, but may not grow faster or even experience temporary growth reversals in the medium- to long-term. The paper finds substantial empirical evidence for the existence of such an intertemporal trade-off for 45 industrialised and emerging market economies. The acceleration of growth immediately after liberalisation is found to be often driven by an investment boom and a surge in portfolio and debt inflows. By contrast, the quality of domestic institutions, the size of FDI inflows and the sequencing of the liberalisation process are found to be important driving forces for growth in the medium to longer term.

Keywords: liberalisation, capital account, economic growth, intertemporal trade-off, quality of institutions, composition of capital flows, sequencing

JEL Classification: F33, F34, F36, F43

Suggested Citation

Fratzscher, Marcel and Bussiere, Matthieu, Financial Openness and Growth: Short-Run Gain, Long-Run Pain? (April 2004). Available at SSRN: https://ssrn.com/abstract=533010 or http://dx.doi.org/10.2139/ssrn.533010

Marcel Fratzscher (Contact Author)

DIW Berlin ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Matthieu Bussiere

Banque de France ( email )

Paris
France