Does Capital Account Liberalization Discipline Budget Deficit?

Review of International Economics, Vol. 11, No. 5, pp 830-844, 2003

36 Pages Posted: 23 Sep 2004

See all articles by Woochan Kim

Woochan Kim

Korea University Business School; European Corporate Governance Institute (ECGI); Asian Institute of Corporate Governance (AICG)

Abstract

The paper investigates whether free capital mobility leads a government to tighten its budget deficit for fear of being penalized from the international capital market. The author tests the hypothesis using three-stage least squares (3SLS), which can control for the endogenous nature of capital account liberalization. Even the conservative measure shows that, if capital account liberalization were exogenously imposed, ceteris paribus, government budget deficit would be reduced by 2.275% of GDP. Furthermore, 3SLS results show that this disciplinary effect is stronger for countries under a fixed exchange rate regime or for countries with weak central bank independence. The disciplinary effect is also found to be stronger in more recent periods - the 1990s - during which capital market integration has been most prevalent.

Keywords: capital account liberalization, disciplinary effect, budget deficit

JEL Classification: F21, F36, H62

Suggested Citation

Kim, Woochan, Does Capital Account Liberalization Discipline Budget Deficit?. Review of International Economics, Vol. 11, No. 5, pp 830-844, 2003. Available at SSRN: https://ssrn.com/abstract=594761

Woochan Kim (Contact Author)

Korea University Business School ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Asian Institute of Corporate Governance (AICG) ( email )

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Sungbuk-gu
Seoul, 136-701
Korea, Republic of (South Korea)

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