Capital Account Openness, Exchange Rate Volatility and Economic Growth: International Experiences and Implications

Li Liling (李丽玲) and Wang Xi (王曦)
Lingnan (University) College, Sun Yat-Sen University, Guangzhou, China 2
Lingnan (University) College and China Institute of Economic Transformation and Opening, Guangzhou
Abstract: Based on the Barro classical growth model, this paper introduces capital
account openness and exchange rate volatility to conduct an empirical analysis using the
panel data of 182 countries (regions) during 1970-2013 to examine the combined effects of
capital account openness and exchange rate risks on economic growth. Our findings are as
follows: (1) Without considering exchange rate volatility, capital account openness is subject
to a threshold effect, i.e. capital account openness significantly promotes the economic
growth of middle- and high-income countries but exerts the opposite effect on low-income
countries; and (2) after exchange rate volatility is taken into account, the growth effect
of capital account openness is reduced and the greater the exchange rate volatility is, the
smaller the marginal effect of capital account openness will be; sample-specific results also
proved the existence of the threshold effect. This paper offers the following implications:
(1) The effect of capital account openness can be better examined based on risk factors; (2)
moderately controlling exchange rate volatility is conducive to acquiring greater benefits
from capital account openness; and (3) the threshold effect of capital account openness
cannot be overlooked.
Keywords: capital account openness, exchange rate volatility, threshold effect, economic
growth
JEL Classification: F31, G28, O11

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