Capital Account Liberalization and Economic Performance: Survey and Synthesis

By Hali J. Edison, Michael W. Klein, Luca A Ricci, Torsten Sløk. Social Science Research Network, 2002

530 citations recorded by the source corpus.

This paper surveys the literature on the effects of capital account openness and stock market liberalization on economic growth and provides a synthesis in which we reconcile some of the different results presented in the literature. Various empirical measures used to gauge the presence of controls on capital account transactions and the liberalization of equity markets are discussed. We compare detailed measures of capital account controls that attempt to capture the intensity of enforcement with other indicators that simply capture whether controls are present. A detailed review of the literature is followed by an empirical section in which we trace the divergence in published results to differences in country coverage, sample periods, indicators of liberalization, and control variables across studies. Specifically, we show that when an institutional variable such as government reputation is added to the specification, the significance of capital account openness vanishes. Also, we demonstrate that enriching the specification by allowing for nonlinearities helps explain why different studies that ignore the nonlinear nature of the relationship find different results.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/12b53107602dadc5c58a45249ac5634301667c7f

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Citations in the corpus

Financial Openness and Growth: Short-Run Gain, Long-Run Pain? (2007, unknown): “The theoretical work by Gourinchas and Jeanne (2002) implies that financial liberalisation yields only a one-off benefit for 1 See Edison et al. (2002a) and Eichengreen (2002) for recent surveys of this literature.”
Capital Market Liberalization and Development (2008, result): “45 Two surveys of the contrasting results in the literature are Eichengreen (2001); and Edison et al. (2002). For a discussion on identification problems focused on Latin American countries, see Ffrench-Davis and Reisen (1998) and Frenkel (1998).”
Capital Controls and Exchange Rate Instability in Developing Economies (2005, unknown): “16 See Edison et al. (2004) for a comparison of different measures of capital controls in the context of an analysis of the effects of capital account liberalization on long-run economic growth.”
What Makes Growth Sustained? (2008, background): “In contrast, the relationship between financial integration and growth is more controversial and less robust empirically (Edison et al., 2004; Kose et al., 2006).”
The Rise in Comovement Across National Stock Markets: Market Integration or it Bubble? (2004, unknown): “Griffin and Karolyi (1998) collect data on 2,400 firms in 25 developed and emerging markets.”
The Aggregate and Distributional Effects of Financial Globalization: Evidence from Macro and Sectoral Data (2018, background): “The first concerns the output effects of capital account liberalization (Eichengreen 2001; Prasad et al. 2003; Edison et al. 2004; Kose et al. 2009; Quinn and Toyoda 2012; Levchencko et al. 2009), the way in which these effects vary across countries depending on the strength of financial institution”