Adjusting to Capital Account Liberalization

69 Pages Posted: 29 Nov 2010

See all articles by Kosuke Aoki

Kosuke Aoki

University of Tokyo

Gianluca Benigno

London School of Economics & Political Science (LSE) - Department of Economics

Nobuhiro Kiyotaki

Princeton University - Department of Economics

Date Written: October 2010

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.

Keywords: capital account liberalization, credit frictions, domestic financial markets

JEL Classification: F32

Suggested Citation

Aoki, Kosuke and Benigno, Gianluca and Kiyotaki, Nobuhiro, Adjusting to Capital Account Liberalization (October 2010). CEPR Discussion Paper No. DP8087, Available at SSRN: https://ssrn.com/abstract=1714859

Kosuke Aoki (Contact Author)

University of Tokyo ( email )

Hongo 7-3-1
Bunkyo-ku
Tokyo, Tokyo 113-0033
Japan

Gianluca Benigno

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 7807 (Phone)

Nobuhiro Kiyotaki

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

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