The Macroeconomic Impact of Financial Crisis 2008-09 KAS Publication Series No. 30, New Delhi, 2010 The Macroeconomic Impact of Financial Crisis 2008-09 A CAPITAL ACCOUNT ANALYSIS OF GERMANY, INDIA AND JAPAN Dayanand Arora (Professor, HTW Berlin, Germany) and Francis Rathinam (Fellow, ICRIER, New Delhi, India) Published by: Office of the Konrad-Adenauer-Stiftung in India 2, Nyaya Marg, Chanakyapuri, New Delhi-110021 Tel: 91-11-26113520 Webpage: www.kas.de © Konrad-Adenauer-Stiftung Responsible: Dayanand Arora and Francis Rathinam Printers: Anshah Publishing House, Delhi-110092
[email protected] Published in 2011 iv Foreword by ICRIER In the wake of the current global crisis, the debate on cross-border financial transactions and capital controls has attracted considerable attention. The near consensus among policy makers around the world, especially in multilateral financial institutions and academia in the 1980s and 1990s, that capital openness is imperative for economic growth started waning after the break out of the Asian crisis. The present crisis has put the role of capital controls and the liberalisation process in perspective as many of the emerging economies that have reasonably isolated themselves financially from the rest of the world have fared better, thus providing support for the “insulation hypothesis”. ICRIER analysed the impact of the 2008-09 crisis on Germany, Japan and India through various transmission mechanisms in the backdrop of their level of financial openness. Though financial markets were not the main channel of transmission in either of these countries, the recent crisis has once again generated a debate on whether a cautious approach regarding the liberalisation of the capital account is better than the ‘big- bang’ approach.