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Opposition to Capital Market Opening

30 Pages Posted: 12 Oct 2011 Last revised: 7 Nov 2011

Philipp Engler

German Institute for Economic Research (DIW Berlin) - Macro Analysis and Forecasting; Freie Universität Berlin

Alexander Wulff

Free University of Berlin (FUB)

Date Written: October 21, 2011

Abstract

We employ a neoclassical growth model to assess the impact of financial liberalization in a developing country on capital owners' and workers' consumption and welfare. We find in a baseline calibration for an average non-OECD country that capitalists suffer a 42 percent reduction in permanent consumption because capital inflows reduce their return to capital while workers gain 8 percent of permanent consumption because capital inflows increase wages. These huge gross impacts contrast with the small positive net effect found in a neoclassical represent agent model by Gourinchas and Jeanne (2006). We further show that the result for capitalists is insensitive to enhanced productivity catch-up processes induced by capital inflows. Our findings can help explain why poorer countries tend to be less financially open as capitalists' losses are largest for countries with the lowest capital stocks, inducing strong opposition to capital market opening.

Keywords: Capital flows, international …nancial integration, growth, neoclassical model, heterogenous agents

JEL Classification: F2, F3, F43, E13, E25, O11

Suggested Citation

Engler, Philipp and Wulff, Alexander, Opposition to Capital Market Opening (October 21, 2011). Available at SSRN: https://ssrn.com/abstract=1942829 or http://dx.doi.org/10.2139/ssrn.1942829

Philipp Engler (Contact Author)

German Institute for Economic Research (DIW Berlin) - Macro Analysis and Forecasting ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Freie Universität Berlin ( email )

Boltzmannstr. 20
D-14195 Berlin
Germany

Alexander Wulff

Free University of Berlin (FUB) ( email )

Kaiserswerther Str. 16-18
Berlin, Berlin 14195
Germany

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