Importance Capital account liberalization becomes a very topical issue since previous crises proved the vulnerability of economies to global capital flows. It is especially true for small open economies. Methods The methodological framework is based on retrospective and econometric analysis of capital account liberalization in South Korea and Iceland. Objectives I study the effect of capital account liberalization and external shock on capital flows. Results As a result of the analysis, I identified the principal steps of capital account liberalization in Iceland and South Korea and describe them briefly. I scrutinize crisis periods in the above countries, and their policies for lifting (imposing) capital flow limitations. The article presents a system of statistical indicators and econometric analysis of the effect capital account liberalization and external shock have on capital flows in South Korea and Iceland. Conclusions and Relevance The capital account liberalization policies and external shock of supply, jointly and separately, have a very considerable effect on capital flows in small open economies and direct investment in Iceland and South Korea, in particular. As the empirical analysis shows, capital account liberalization process has a very ambivalent influence on small open economies.
Keywords: capital account liberalization, flexible exchange rate, capital flow management
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