Macroeconomics of Capital Account Liberalization

Lead Research Organisation: London School of Economics and Political Science
Department Name: Centre for Economic Performance

Abstract

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Publications

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Aoki K (2010) Adjusting to capital account liberalization

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Aoki K (2010) Adjusting to capital account liberalization

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Benigno G (2013) The Financial Resource Curse* in The Scandinavian Journal of Economics

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Benigno G (2012) Reserve accumulation, growth and financial crises

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Benigno G (2012) Reserve accumulation, growth and financial crises

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Benigno G (2012) Capital Controls or Exchange Rate Policy? A Pecuniary Externality Perspective in SSRN Electronic Journal

 
Description In this research agenda we have studied the benefits and costs of capital account liberalisation. The original Washington consensus that developed in the early 2000s endorsed financial globalisation and its benefits. Our research agenda emphasises the risks associated with financial market liberalisation. In one case (more precisely in the paper "Adjusting to Capital Account Liberalisation") we show how capital account liberalisation can be costly for an economy when domestic financial markets are not sufficiently developed. In this case indeed financial markets liberalisation can induce a misallocation of resources towards activities that are less productive and result in low productivity growth. In another output of this research agenda ("The financial Resource Curse") we study a related misallocation problem in which cheap access to international financial markets (i.e. low world interest rate) might divert resources towards non-traded sectors such as construction and impair long-run growth. We then examine different type of policies that can mitigate these adverse consequences: we show how both capital controls and foreign reserve accumulation could be used as second-best policies to limit the resource allocation problem.
Exploitation Route From an academic point of view there are several way in which the analysis of our paper has been and could be expanded. For example Ricardo Reis (https://www.brookings.edu/bpea-articles/the-portuguese-slump-and-crash-and-the-euro-crisis/) applies our framework to discuss the Portuguese slump after joining the Eurozone .
Similarly I would expect that international institutions like the IMF and the BIS would be interested in our findings and could extend our research by generalising the framework and test the empirical predictions of our analysis.
Sectors Education,Other
URL http://www.bloomberg.com/view/articles/2015-10-26/how-nations-can-avoid-the-financial-resource-curse
 
Description Few commentators have referred to our research. http://www.investorschronicle.co.uk/2013/06/24/comment/chris-dillow/the-cheap-money-curse-2E6HGJb2SltEiV5nVdiZCK/article.html https://www.bloomberg.com/view/articles/2015-10-26/how-nations-can-avoid-the-financial-resource-curse
First Year Of Impact 2013
Sector Education
Impact Types Economic
 
Description Discussion on "prudential policy for peggers" by S. Schmitt-Grohe and M. Uribe 
Form Of Engagement Activity Participation in an activity, workshop or similar
Part Of Official Scheme? No
Primary Audience
Results and Impact NBER, EF&G Research Meeting, New York, 26th October 2012.
Year(s) Of Engagement Activity