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Capital market liberalization: Optimal tradeoff and bargaining delay

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  • Dong, Baomin
  • Gu, Xinhua
  • Song, Huasheng

Abstract

Host and investing countries are faced with a tradeoff between growth and volatility arising from capital flows. The host country seeks capital inflows for high growth, yet worries about accompanying volatility so much that it limits capital market opening due to its financial weakness. However, the investing country solicits quick and safe returns from capital outflows by requesting wide foreign openness. It is often observed that one side’s push for opening encounters the other side’s reluctance. We examine how this conflict of interest is resolved for international compromise equilibrium through sequential bargaining between the two sides with private valuations of capital flows. We find that openness bargaining can end up with strategic delay after information revelation. This finding sheds light on certain puzzles in international finance.

Suggested Citation

  • Dong, Baomin & Gu, Xinhua & Song, Huasheng, 2017. "Capital market liberalization: Optimal tradeoff and bargaining delay," The North American Journal of Economics and Finance, Elsevier, vol. 39(C), pages 78-88.
    • Handle: RePEc:eee:ecofin:v:39:y:2017:i:c:p:78-88
    DOI: 10.1016/j.najef.2016.12.003
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    More about this item

    Keywords

    Financial integration; Volatility; Growth; Capital controls; Bargaining;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • F15 - International Economics - - Trade - - - Economic Integration
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F59 - International Economics - - International Relations, National Security, and International Political Economy - - - Other

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