Does Capital Scarcity Matter?
This paper quantifies the welfare impact of a permanent increase in the level of per capita income brought about by a temporary increase in the growth rate of GDP per capita following capital account liberalization. In the immediate aftermath of liberalization, and under a range of assumptions, differences between the autarkic and integrated equilibrium consumption paths are large. Yet the welfare impact of these differences is small when using infinite horizon consumption streams to compute welfare gains. The results suggest that a finite horizon framework may be more appropriate and policy-relevant for evaluating the welfare consequences of economic policy changes that induce temporary growth effects but have a permanent impact on the level of per capita incomes.
We thank Pierre-Olivier Gourinchas, Mike Hutchison, Alwyn Young and seminar participants at the NIPFP Capital Flows Conference, Ministry of Finance, India and UNC-Chapel Hill. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. Peter Blair Henry serves on the NBER Board.