Economic Issues

Liberalizing Capital Movements: Some Analytical Issues

Author/Editor:

Gian M Milesi-Ferretti ; Enrica Detragiache ; A. J. Tweedie ; Michael Mussa ; Barry J. Eichengreen ; Giovanni Dell'Ariccia

Publication Date:

March 30, 2005

Electronic Access:

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Summary:

This paper addresses the potential gains and risks of open capital markets by first looking at what classical economic theory suggests aboutthe benefits of capital mobility and then examining the counterargumentsarising from problems of incomplete information and other distortions.It shows that the risks of removing controls on flows of capital acrossnational borders are similar to those associated with removing controlson domestic financial institutions. The paper then explores how to manageliberalization to minimize the risks and maximize the benefits.

Series:

Economic Issues No. 2005/002

Subject:

Balance of payments Capital account Capital account liberalization Capital flows Financial crises Financial sector policy and analysis Moral hazard