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During the last few decades, many emerging markets have lifted most restrictions on international asset trade. The conventional view was that capital would flow into these countries raising investment and growth; these countries would use international capital markets to smooth domestic shocks and achieve less volatile consumption; and financial integration would encourage the development of domestic financial markets. However, the evidence suggests that this conventional view was wrong. In this paper, the authors present a simple model of financial liberalization that can help them to think through the observed effects of financial liberalizations.
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