Grossmont College Effects of Capital Account Liberalization Paper

Exerpt: “In contrast to existing surveys, this article demonstrates that a critical reading of the literature reveals that the textbook theory of liberalization stands up to the data quite well. It is true that most papers find no effect of liberalization on growth. But these papers tell us nothing about the empirical validity of the theory. They perform purely cross-sectional regressions that look for a positive correlation between capital account openness and economic growth, implicitly testing whether capital account policy has permanent effects on differences in long-run growth rates across countries. The fundamental problem with this approach is that the neoclassical model provides no theoretical basis for conducting such tests. The model makes no predictions about the correlation between capital account openness and long-run growth rates across countries, and certainly does not suggest the causal link needed to justify cross-sectional regressions”