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Financial Liberalization in a Small Open Economy

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  • Jürgen von Hagen
  • Haiping Zhang

Abstract

We analyze the long-run and short-run implications of financial liberalization in a small open economy. Our main results are as follows. First, whether financial deregulation in one sector can improve production efficiency may depend on financial regulation in other sectors. Second, financial liberalization may have opposite welfare implications to domestic agents with different productivity in the long run. Third, although some domestic agents lose in the long run, they benefit from financial liberalization during the transitional process of deregulation. Finally, a gradual implementation helps achieve a smooth transition.

Suggested Citation

  • Jürgen von Hagen & Haiping Zhang, 2006. "Financial Liberalization in a Small Open Economy," CESifo Working Paper Series 1771, CESifo.
    • Handle: RePEc:ces:ceswps:_1771
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    References listed on IDEAS

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    1. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-248, April.
    2. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Solving dynamic general equilibrium models using a second-order approximation to the policy function," Journal of Economic Dynamics and Control, Elsevier, vol. 28(4), pages 755-775, January.
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    8. Iacoviello, Matteo & Minetti, Raoul, 2006. "International business cycles with domestic and foreign lenders," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 2267-2282, November.
    9. Alessandria, George & Qian, Jun, 2005. "Endogenous financial intermediation and real effects of capital account liberalization," Journal of International Economics, Elsevier, vol. 67(1), pages 97-128, September.
    10. repec:bla:jfinan:v:58:y:2003:i:2:p:867-894 is not listed on IDEAS
    11. Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(4), pages 647-663.
    12. Nobuhiro Kiyotaki & John Moore, 2002. "Liquidity and Asset Pricing," Edinburgh School of Economics Discussion Paper Series 116, Edinburgh School of Economics, University of Edinburgh.
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    Cited by:

    1. repec:ocp:rpaper:pp-15/08 is not listed on IDEAS
    2. von Hagen, Jürgen & Zhang, Haiping, 2008. "Financial frictions, capital reallocation, and aggregate fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 32(3), pages 978-999, March.
    3. Jurgen von Hageny & Haiping Zhang, 2007. "A Welfare Analysis of Capital Liberalization," Macroeconomics Working Papers 22489, East Asian Bureau of Economic Research.
    4. Heijdra, Ben J. & Ligthart, Jenny E., 2007. "Fiscal policy, monopolistic competition, and finite lives," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 325-359, January.
    5. repec:onb:oenbwp:y::i:141:b:1 is not listed on IDEAS
    6. Jürgen Von Hagen & Haiping Zhang, 2008. "A Welfare Analysis of Capital Account Liberalization," Review of International Economics, Wiley Blackwell, vol. 16(3), pages 576-590, August.
    7. Haiping Zhang & Jurgen von Hagen, 2007. "Financial Development and International Capital Flows," Working Papers 16-2007, Singapore Management University, School of Economics.
    8. Kerstin Gerling, 2008. "The Real Consequences of Financial Market Integration when Countries Are Heterogeneous," Working Papers 141, Oesterreichische Nationalbank (Austrian Central Bank).

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    Keywords

    financial frictions; financial liberalization; foreign borrowing; macroeconomic fluctuations; overshooting;
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