Do finite horizons matter? The welfare consequences of capital account liberalization

Abstract

A large literature that evaluates capital account liberalization at the infinite horizon finds trivial welfare gains of the policy change. In contrast, evaluating capital account liberalization at finite horizons yields a large and significant impact on consumer welfare. Hicksian-equivalent-variation calculations indicate that the representative consumer would require a 44 percent increase in consumption to remain indifferent between opening up or continuing to live in autarky. As the evaluation horizon increases, the additional welfare gains from opening up moderate and gradually converge to zero as time approaches infinity. These results suggest that the welfare gains of capital account liberalization evaluated at a series of finite horizons are more appropriate and policy-relevant than an evaluation conducted at infinity.