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Volatile capital flows: Interactions between de jure and de facto financial liberalization

Author

Listed:
  • Rebecca Neumann

    (University of Wisconsin - Milwaukee)

  • Ron Penl

    (University of Wisconsin - Milwaukee)

Abstract

Utilizing a panel data set for 13 developed economies, this paper examines the volatility of capital flows following the liberalization of financial markets. The paper focuses on the response of foreign direct investment, portfolio flows, and other debt flows to both financial liberalization and increased capital flows. The regression analysis examines how capital volatility is affected by the interaction between de jure financial liberalization (an index of liberalization) and de facto liberalization (the volume of capital flows). At average and high volumes of capital, financial liberalization is found to increase capital volatility as expected. At lower volumes of capital, financial liberalization reduces capital volatility, particularly for foreign direct investment and other flows, indicating there may be a threshold level of capital flows below which financial liberalization reduces volatility.

Suggested Citation

  • Rebecca Neumann & Ron Penl, 2008. "Volatile capital flows: Interactions between de jure and de facto financial liberalization," Economics Bulletin, AccessEcon, vol. 6(3), pages 1-10.
    • Handle: RePEc:ebl:ecbull:eb-07f30011
    as

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    References listed on IDEAS

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    Cited by:

    1. Ousama Ben Salha & Tarek Bouazizi & Chaker Aloui, 2012. "Financial Liberalization, Banking Crises and Economic Growth: The Case of South Mediterranean Countries," Global Economy Journal (GEJ), World Scientific Publishing Co. Pte. Ltd., vol. 12(3), pages 1-22, August.

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    More about this item

    Keywords

    volatility;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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