Capital account liberalization and capital mobility: an analysis based on Sri Lanka

Abstract

Introduction:

Mobility of capital is the ability of capital to move across national boundaries seeking higher returns. According to Eichengreen et al. (1998), capital mobility creates opportunities for portfolio diversification, risk sharing, and inter-temporal trade. Bailliu (2000) found evidence that capital inflows foster higher economic growth. An argument by Quirk and Evans (1995) on capital account liberalization emphasis that the growing difficulties of enforcement policies designed to limit international capital flows increasingly invasive and distorting in a world of highly developed capital markets. Eichengreen et al. (1999) describe as “explosive growth” of international financial transactions and capital flows as one of the most far-reaching economic developments of the twentieth century. There is a dearth of studies that examines the impact of capital account liberalization in Sri Lanka, but most of those studies are commentaries and it does not consider the empirical relationship between liberalization and capital mobility.