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Please use this identifier to cite or link to this item: http://hdl.handle.net/2108/314

Title: Welfare implications of capital account liberalization
Authors: Faia, Ester
Keywords: endogenous borrowing limit
financial liberalization
consumption volatility
Issue Date: Mar-2007
Publisher: CEIS
Series/Report no.: CEIS Tor Vergata Research Paper; 96
Abstract: In recent decades, capital account liberalization in emerging economies has often been followed by a surge in capital inflows, despite the presence of severe informational asymmetries for foreign lenders. Empirical studies have shown that in emerging economies financial liberalization has led to an increase in consumption volatility (also relative to output). I use a small open economy model where foreign lending to households is constrained by an endogenous borrowing limit. Borrowing is secured by collateral in the form of durable investment whose accumulation is subject to adjustment costs. This economy is able to replicate the aforementioned stylized fact in response to various shocks (productivity, foreign demand and government expenditure). I find that financial liberalization reduces welfare since it increases the volatility of consumption and employment.
URI: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962668
http://hdl.handle.net/2108/314
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