Capital liberalization, growth and moral hazard: Lessons from the global financial crisis

Abstract

The 2008 global crisis, initiated in the USA, a developed country, is significant as it's the last global crisis caused by capital flows. This study investigates the link between capital account liberalization and economic growth during the 2008 global crisis in 105 countries, including moral hazard. Furthermore, it considers portfolio equity and debt flows as asset characteristics and tests two moral hazard channels (i.e., sudden stop and credit booms) employing the OLS estimation technique. The findings show that capital inflows promote growth, with portfolio equity flows having more contribution and stability than portfolio debt flows. The hypothesis is verified that the excessive risk-taking behavior of financial institutions caused the 2008 crisis. Capital accumulation and credit expansion contribute to growth, but trade openness, sudden stop and labor force participation decrease growth. Decision-makers should evaluate capital inflows independently based on asset characteristics and implement distinct policies. Microeconomic strategies (such as revising limited liability) might mitigate the risks in capital account liberalization.