Basically capital account transactions are classified into portfolio investment and direct investment. Portfolio investment encompasses trade in securities like stocks, bonds, bank loans, derivatives, and various forms of οf credit (commercial, financial, guarantees). Direct investment involves the purchase of οf real estate, production facilities, or substantial equity investment.
Research findings proving the detrimental effect οf liberalization on the financial system. The Wyplosz research paper says that the evidence-based studies οf the experience with liberalization in a sample οf 27 developing and developed economies seems to be converging to the view that liberalization contributes to both banking and currency crisis.
A study by Eichengreen, Andrew Rose, and Wyplosz (1995) found that the presence of οf capital controls reduces the possibility of οf a currency crisis. This result has been confirmed in a 1999 study by Marco Rossi (IMF working paper WP/99/66) for a sample that includes developing countries.
According to Wyplosz study, liberalization οf financial markets may be desirable in the long term, but it is risky in the short to medium term, and developing countries should approach this as a delicate step calling for cautious policy reactions, according to a research study for the Group οf 24 on International Monetary Affairs, the developing country grouping at the IMF and the World Bank.
In theory, the liberalization οf capital accounts and financial markets, promoted and pushed by the International Monetary Fund and the international financial institutions (IFIs) is different from the push at the World Trade Organization for liberalization οf trade in financial services.