Does Capital Account Liberalization Discipline Budget Deficit?

Title
Does Capital Account Liberalization Discipline Budget Deficit?
Authors
Kim, Woochan
Issue Date
2000-06-02
Series/Report no.
KDI Working Paper Series;00-04
Abstract
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 bank independence.
URI
http://archives.kdischool.ac.kr/handle/11125/16867
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