Centre for Growth and Business Cycle Research Discussion Paper Series

'Capital Account Openness and Bankruptcies'

Luis Angeles

November 2005, Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 65. Download PDF file (354KB).

This paper presents a model where opening the capital account of an economy causes more bankruptcies to take place in the non tradables sector. Non tradable firms must forecast the future state of the economy when investing since the demand for their goods depends on this. In our model the interest rate is a powerful signal that non tradable firms use when the capital account is closed, but its informational content decreases once the capital account opens up and international (as well as domestic) shocks affect it.