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Labor Market Institutions and the Effects of Financial Openness

Abstract: 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.

Keywords: Developing Countries; capital account liberalization; Labor Market Rigidity; Financial Openness; Unemployment;

JEL Classification: E24; F41; F44; J08;

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Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Research Working Paper

Publication Date: 2020-02-03

Number: RWP 19-11

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