Department of Economics

CAPITAL ACCOUNT OPENNESS, INTERNATIONAL TRADE, AND ECONOMIC GROWTH

Department of Economics

University of Delaware

Working Paper #2003-06

CAPITAL ACCOUNT OPENNESS, INTERNATIONAL TRADE, AND ECONOMIC GROWTH:

A CROSS-COUNTRY EMPIRICAL INVESTIGATION

James L. Butkiewicz and Halit Yanikkaya

ABSTRACT

This paper investigates the relationship between capital account openness and growth. Our empirical investigation of the effects of capital restrictions on growth provides evidence supporting capital account liberalization, especially for developed countries. We also show that capital restrictions are more likely to reduce the benefits of foreign direct investment on growth in developing countries. Estimation results for long-term capital flows demonstrate that countries with higher flows tend to grow faster, and these results challenge the belief that countries must have attained a threshold level of development or human capital to benefit from capital inflows. Moreover, our results imply a substitute relationship between trade with developed countries and foreign direct investment inflows.

JEL classification: F21, F43, O11, O50

Key Words: Financial Openness, Capital Controls, Capital Flows, Economic Growth

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