“Capital Account Openness and Unemployment” by Jun Nie
Federal Reserve Bank at Kansas City
Asian Development Bank
We investigate how capital account openness affect a country's unemployment in this paper. Based on a standard labor search and match model with capital control, we show that a rise in capital account openness will lead to a lower unemployment in the steady state when the labor market is flexible. However, a rise in capital account openness can yield a higher unemployment when labor market becomes sufficiently rigid. We provide empirical evidence to support our theoretical predictions. We then use the model to study the effectiveness of capital controls, both in ow and outflow capital controls, on unemployment, output, and welfare.