Recent literature has proposed two alternative types of financial frictions, i.e., limited commitment and incomplete markets, to explain the empirical patterns of international capital flows between developed and developing countries in the past two decades. This paper integrates these two...

We address three related questions concerning financial liberalization in a small open economy. Does financial liberalization and the resulting capital inflow improve production efficiency in the domestic economy? Who benefits from financial liberalization in the long run and in the short run?...