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Indiana University Bloomington

BEPP

The Kelley Advantage

The department is home to the authors of Managerial Economics and Business Strategy and Games and Information: An Introduction to Game Theory, two of the nation’s leading textbooks in the field.

Research and Publications

Journal Articles

A Welfare Analysis of Capital Account Liberalization

2008, Review of International Economics

Jürgen von Hagen, Haiping Zhang

Abstract

We develop a model of a small open economy with credit market frictions to analyze the consequences of capital account liberalization.We show that financial opening facilitates the inflows of cheap foreign funds and improves production efficiency. However, capital account liberalization has important distributional consequences. Specifically, it may be impossible to use public transfers to fully compensate the loss of those who are negatively affected by capital account liberalization.This explains why financial opening often meets fierce opposition even though it leads to efficiency gains for the economy as a whole. From a practical perspective, capital controls should be lifted gradually for a smooth transition.

Citation

von Hagen, Jürgen and Haiping Zhang (2008), "A Welfare Analysis of Capital Account Liberalization," Review of International Economics, Vol. 16, No. 3, August, pp. 576-590.