A Theory of Financial Liberalisation: Why are Developing Countries so Reluctant?

摘要

This study models capital flows as a risky growth opportunity and financial openness as an optimal trade-off between volatility and growth. A formal mean-variance approach is adopted to analyse trade-off optimisation after taking into account the fact that both sides of capital flows are risk averse. Under capital inflows, the relationship between growth and instability may be complementary if developing countries open up their capital markets that are still weak. In this case, there is a real trade-off; that is, great volatility is a price needed to pay for rapid growth, or slow growth can be traded for small volatility. Also, the relationship under inflows may be substitutable.