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The Political Economy of Capital Account Liberalization

by Nancy Brune, Alexandra Guisinger, Jason Sorens, and Geoffrey Garrett

Geoffrey Garrett Email Geoffrey Garrett

What determines the capital account policy choices of national governments? Using a new dataset on capital account policy available for 173 countries over the period 1973-1999, our analysis yields five primary findings. First, consistent with the Mundell-Fleming approach to open economy macroeconomics, countries with fixed exchange rates tend to have less open capital accounts. Second, capital accounts remain more closed in less developed countries. Third, integration into the international economy is associated with capital account liberalization. Fourth, government spending and open capital accounts go hand-in-hand in developed countries, whereas countries with larger public economies tend to have less open capital accounts in the developing world. Finally, democracy promotes capital account liberalization, particularly in developing countries.

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