Learning to Open Up: Capital Account Liberalizations in the Post-Bretton Woods Era

51 Pages Posted: 2 Feb 2015

See all articles by Zorobabel Bicaba

Zorobabel Bicaba

African Development Bank

Fabrizio Coricelli

University of Siena - Department of Political and International Sciences ; Paris School of Economics (PSE); Centre for Economic Policy Research (CEPR)

Date Written: February 2015

Abstract

The Great Recession has shattered the consensus on the benefits of capital account liberalization. Capital account controls have been introduced in several countries and have even been supported by the International Monetary Fund. In this paper we investigate whether capital account policies in the post-Bretton Woods era can be explained as a process driven by learning by policymakers, who update their beliefs on the basis of their own experience and of the policies adopted by other countries. We emphasize the impact of financial crises on the learning process. The learning model developed in the paper explains more than 90% of the variability of capital account policies. We find that over time beliefs about the growth effects have changed slowly and not smoothly from negative to positive. However, at the outset of the Great Recession beliefs on the positive growth dividends from capital account liberalization were still affected by a significant degree of uncertainty, which suggests that reversals in external liberalizations in the aftermath of the Great Recession are consistent with rational learning by policymakers. Finally, in evaluating the potential benefits and costs of capital controls in a given set of countries, contagion effects through changing beliefs of other countries should be taken into account.

Keywords: beliefs, capital account liberalization, learning, strategic experimentation

JEL Classification: C79, D8, E61, F42, G15, G18

Suggested Citation

Bicaba, Zorobabel and Coricelli, Fabrizio, Learning to Open Up: Capital Account Liberalizations in the Post-Bretton Woods Era (February 2015). CEPR Discussion Paper No. DP10389, Available at SSRN: https://ssrn.com/abstract=2559330

Zorobabel Bicaba (Contact Author)

African Development Bank ( email )

Fabrizio Coricelli

University of Siena - Department of Political and International Sciences ( email )

Via Mattioli, 10
Siena, 53100
Italy

Paris School of Economics (PSE)

48 Boulevard Jourdan
Paris, 75014 75014
France

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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