The Origins of Financial Openness: A Study of Current and Capital Account Liberalization

Abstract

Theory: We assess the determinants of the national regulation of international finance, or the comparative degree of national financial openness or closure. Hypotheses: Partisanship interacts with a nation's factor endowments to account in part for different international financial policies by governments of the same partisan hue. Methods: We offer a quantitative measure of international financial openness, or current and capital account regulation, for 21 member countries of the Organization for Economic Cooperation and Development for 1950-88. We use regression analysis employing Panel Corrected Standard Errors to discover the determinants of financial openness. Results: Our main finding is that political partisanship substantially explains openness, but does so in complex ways. Differences in both political institutional arrangements and types of political economy also account for part of the differences in international financial regulation.