Working Paper

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: J08; F44; F41; E24;

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Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Research Working Paper

Publication Date: 2019-11-26

Number: RWP 19-11

Pages: 1-39

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