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Review of Capital Account Liberalization:

Theory, Evidence, and Speculation

王平 1081209017
PETER BLAIR HENRY wrote a famous article Capital Account Liberalization: Theory, Evidence,

and Speculation in 2007.This Journal researched the difference and relationship

between capital account liberalization temporarily and permanently.

When talking about whether capital account liberalization have impact on real variables, most

papers that find no effect of liberalization on real variables tell us nothing because they do not

really test it. In this paper Henry discusses what is necessary to test the theory and examines

papers that have done so.

There are two starkly different views about the wisdom of capital account liberalization as a policy

choice for developing countries. First one is Allocative Efficiency: standard neoclassical growth

model( Solow 1956). This theory holds that there is no correlation between the openness of

countries’ capital accounts and the amount they invest or the rate at which they grow because of

distortions (Rodrik 1998). But evidence seemingly continues to mount in support of the view of

Rodrik.

In Solow model the impact of capital account liberalization on a developing country has a positive

relationship with the GDP.

Does capital account liberalization promote a more efficient allocation of resources across
countries? Methodology, data, and results associated with the traditional, cross-sectional approach

to this question.

Rodrik’s regressions show no statistically significant correlation between growth and SHARE. So

he thinks there is no relation between restriction and investment. But his theory has problems. He

thinks the capital account either completely closed or completely open. Dennis Quinn (1997) uses

the information in the AREAER to create a measure of the intensity of capital account openness

that is CAPITAL(0-4). Quinn runs cross-sectional regressions of average annual growth rates on

changes in CAPITAL and finds a positive and significant correlation. When talking about why

cross-sectional studies find no impact of liberalization on growth, Henry thought there are three

reasons. Cross-sectional studies test for a permanent effect of liberalization on growth when

theory says that the impact should be temporary. Many of the papers in this literature include both

developed and developing countries in the sample when theory argues for a separate examination

of the two types of countries. The variable SHARE contains important sources of measurement

error that hinder empirical attempts to capture the impact of liberalization on the real economy.

In order to solve the problem of Cross-Sectional Studies, the Policy-Experiment Approach

appeared. The policy-experiment approach grapples with the complexity of identifying

liberalization dates by narrowing the scope of the problem .Policy experiment literature tries to

identify the first point in time that a country liberalizes a specific aspect of its capital account

policy. But there are still problems with the theory. Financial impact of liberalization is smaller

than anticipated. Total factor productivity does not enter into the story.

All theories we talked above suggest that liberalization promotes some efficient movement of

capital between countries it says nothing about the efficiency of capital allocation within

countries. In order to find efficiency of capital allocation within countries should study at firm

level
In the firm level there are two channels through which liberalization changes a firm’s cost of

capital: Interpret term, slope term .All the firms in one country have the same level of interpret

term and different firm has different slope term.

The author thinks there is little evidence that economic growth and capital account openness are

positively correlated across countries, but there is lots of evidence that opening the capital

account leads countries to temporarily invest more and grow faster than they did when their

capital accounts were closed.

So when we ask whether capital account liberalization have impact on real variables, we should

know temporary or permanent. If we are talking about temporary affect, we can say it actually has

a positive impact. But when we talking about permanent we just can say there is little evidence

about this question.

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