All industrialized nations relied on capital account controls for significant periods of their economic development and relaxations of capital account restrictions thought to be an integral aspect of economic development. Economists long advocated the removal of capital controls as a stabilizing factor of the development process to improve efficiency and return economies from distorted factor p...

In the middle of two crises, the first one in 1982 and a second one in 1986, Mexico initiated a new economic strategy, inaugurated with two important reforms: trade liberalization, and financial liberalization and deregulation. With the first reform the economic wanted to reposition Mexico in the international division of labor. With the second one they aimed at attracting capital inflows and m...

Cross-country studies associate financial liberalization with increases in aggregate productivity. This paper argues that this finding can be mainly attributed to reductions in distortions in capital markets that promote competition and encourage firms’ investments in technology. I first develop a simple small open economy model in which capital controls distort access to international borrowin...

Preliminary Draft Comments welcome This paper studies the role of banks in the propagation of nominal shocks in a small open economy. It builds on the framework developed in Edwards and Végh (1997), by relaxing the assumption of perfect asset substitutability between foreign and local bonds. The main results are as follows. Financial liberalization induces a decrease in loan spreads, an expansi...

1 Paper prepared for UNDP/IDB/World Bank/CEPAL project " Balance of Payments Liberalization, Distribution and Poverty in Latin America " and originally presented at project seminar in Rio de Janeiro, other seminar participants, as well as to Geske Dijkstra and an anonymous referee for helpful comments on a previous draft. The Institute of Social Studies is Europe's longest-established centre of...