PDFDownload paper RWP 19-11, November 2019; updated February 2020
We propose a new channel to explain why developing countries may fail to beneﬁt from ﬁnancial globalization, based on labor market institutions. In our model, ﬁnancial openness in a developing country with a rigid labor market leads to capital outﬂow, and both employment and output fall. In contrast, ﬁnancial openness in a developing country with a ﬂexible labor market beneﬁts the country. Our model suggests that enhancing labor market ﬂexibility is a complementary reform for developing countries opening capital accounts.
JEL Classification: E24; J08; F41; F44
Du, Qingyuan, Jun Nie, and Shang-Jin Wei. “Labor Market Institutions and the Eﬀects of Financial Openness.” Federal Reserve Bank of Kansas City, Research Working Paper no. 19-11, November. Available at External Linkhttps://doi.org/10.18651/RWP2019-11