Abstract
This paper examines how an open economy determines its financial openness and deals with volatile capital flows when deciding to utilize them for output growth. We find that higher economic instability is an inevitable price paid for faster growth if a country permits wider openness without reversing its financial vulnerability. We prove that the country can leave its capital market wider open to achieve higher growth and lower instability if its financial system has been strengthened substantially. We show why some financially advanced countries request reluctant developing countries to liberalize their immature markets and how the conflict of interest between the two parties is formulated. The paper also presents a large sample of cross-country experiences with tradeoffs between growth and instability, with the observed evidence supporting our theoretical predictions.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
