Capital Account Liberalization, Financial Depth, and Economic Growth

Working Paper 99-6
by Michael Klein and Giovanni Olivei
1999 Series

We show a statistically significant and economically relevant effect of open capital accounts on financial deepness and economic growth in a cross-section of countries over the period 1986 to 1995. Countries with open capital accounts over some or all of this period had a significantly greater increase in financial depth than countries with continuing capital account restrictions, and they also enjoyed greater economic growth. These results, however, are largely driven by the developed countries included in the sample. The observed failure of capital account liberalization to promote financial deepness among developing countries suggests potentially important policy implications concerning the desirability of opening up the capital account.

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