The Macroeconomics of Capital Account Liberalization: Recent Developments

Abstract

The issue of capital account openness and its macroeconomic consequences, in particular on economic growth, financial stability and fiscal discipline, has stimulated an intense interest in academia and policy debates in emerging and developing countries. This article first addresses the importance of capital account liberalization and, second, it explains the key concepts of international financial integration (IFI) and focuses on measurement and quantification issues. Third, it describes major trends in capital account openness and financial integration over the past three decades. Finally, the article briefly reviews the main works on the effect of the IFI on long-term economic growth. We conclude that following the global financial crisis of 2008, there was a shift in the position of policymakers, challenging the pre-existing consensus regarding capital account management. Consequently, the International Monetary Fund (IMF) has adjusted its position, supporting the preventive use of capital controls from 2022. Although the empirical literature has not yet provided conclusive results regarding the direct effects of opening of the capital account on economic growth, a growing consensus is emerging as to its rather “catalytic” role. However, the disciplinary effect on macroeconomic policies, especially fiscal policy, remains understudied in the literature. This work has revealed that the question regarding capital account openness remains complex to which there is yet no clear and definitive answer, and that this ongoing debate has important implications for capital account policies in emerging markets.

Keywords: Capital account, Open economy macroeconomics, Economic growth, Financial stability, International financial integration.

Classification JEL: F32 F41 O40 G28 F36

Paper type: Theoretical Research