NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Capital Account Liberalization, Institutional Quality and Economic Growth: Theory and Evidence

Michael W. Klein

NBER Working Paper No. 11112
Issued in February 2005, Revised in November 2005
NBER Program(s):   IFM

This paper shows that the effect of capital account liberalization on growth depends upon the environment in which that policy occurs. A theoretical model demonstrates the possibility of an inverted-U shaped relationship between the responsiveness of growth to capital account liberalization and institutional quality. Three empirical specifications based on the model are estimated using a panel of 71 countries. Estimates of all three specifications support the hypothesis of a non-monotonic interaction between the responsiveness of growth to capital account liberalization and institutional quality, with about one-quarter of the countries, those with better (but not the best) institutions exhibiting a statistically significant and economically meaningful effect of capital account openness on economic growth.

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Document Object Identifier (DOI): 10.3386/w11112

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