Thus, large inflows of capital, well in excess of the current financing needs, can lead to high domestic credit and monetary growth, boom in stock market and other asset prices, and general excess domestic demand leading to macroeconomic and financial instability. Abrupt reversals in capital flows also lead to significant difficulties in monetary and macroeconomic management.
While, in principle, capital account liberalisation is expected to benefit the host economy and raise its growth rate, this theoretical conjecture is not supported by the accumulated empirical evidence. Despite an abundance of cross-section, panel, and event studies, there is strikingly little convincing documentation of direct positive impacts of financial opening on the economic welfare levels or growth rates of developing countries.