Does Capital Account Liberalization Discipline Budget Deficit?
- Does Capital Account Liberalization Discipline Budget Deficit?
- Kim, Woochan
- Issue Date
- Series/Report no.
- KDI Working Paper Series;00-04
- This paper investigates whether free capital mobility leads a government to tighten its budget
deficit in fear of being penalized from the international capital market. It tests the hypothesis
using 3SLS (three-stage least squares), which can control for the endogenous nature of capital
account liberalization. Even the most conservative measure shows that, if capital account
liberalization were exogenously imposed, ceteris paribus, government budget deficit would
have reduced by 2.275% of GDP. Furthermore, 3SLS results show that this disciplinary effect
is stronger for countries under a fixed exchange rate regime or for countries with a weak central
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