This raises issues about the pace and composition of the liberalisation the drivers of which are eclectic and country specific rather than based on universal principles. Broadly, three determining factors are important: (a) the preconditions for opening up of capital account (b) the cost and effectiveness of capital account restrictions and (c) monetary policy implications of an increasingly open capital account.
First, losses associated with government debt weaken balance sheets of banks making funding more costly and difficult to obtain. ii. Second, higher sovereign risks reduce the value of the collateral that banks can use to raise wholesale funding and central bank liquidity. iii.