Capital account openness and unemployment

Qingyuan Du | Monash

We investigate how capital account openness affect a country's unemployment in this paper. In theory, using a standard labor search and match model, we find that, a rise in capital account openness may lead to lower unemployment when labor market is flexible. However, a rise in capital account openness can result in higher unemployment when labor market becomes sufficiently rigid. Empirically, we provide suggestive evidence to support the theoretical predictions. Using the model, we also study the effectiveness of capital controls on unemployment, output, and welfare.