Effects of Capital Flow Liberalization: What is the Evidence from Recent Experiences of Emerging Market Economies?

IMF Working Papers, November 16, 2012

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This paper analyzes the experiences of emerging market economies (EMEs) that have liberalized capital flows over the past 15 years with respect to macroeconomic performance and risks to financial stability.
The paper uses panel data regressions and examines variation in effects depending on thresholds.
As an application, the paper explores possible effects of liberalization on China by applying the coefficients of explanatory variables to the corresponding variables of China in 2012–16.

Greater openness to capital flows is associated with:
- higher growth
- higher gross capital flows
- higher equity returns
- lower inflation
- lower bank capital adequacy ratios
The effects vary depending on thresholds (heterogeneous impacts across different conditions).

The paper explores potential effects of capital flow liberalization on China by applying estimated coefficients from the panel regressions to China’s corresponding variables in 2012–16.

IMF Working Paper No. 2012/275