The theory of capital market liberalization is based on two central assumptions- convex technologies and concave preference functions faced by agents. Standard models employed by the economists of the International Monetary Fund (which we simply call the Fund) justifiably reveal that more the financial market is globally integrated, the better are the risks dispersed, based on the above mentioned assumptions. So, the Fund's economists deliberately claim that full capital market liberalization helps cross-country smoothing of any adverse shock. However, ironically, the above-mentioned proposition is true when capital flows are counter cyclical. In reality, capital flows pro-cyclically because of the credit market imperfections, giving rise to a natural set of non-convexities. In this paper, we have made a modest attempt to review why capital market liberalization leads to economic instability instead of accelerating economic growth.

1. Akerlof, G. (2002). Behavioural macroeconomics and macroeconomic behaviour. American Economic Review, 92 (3), 411-433. DOI: 10.1257/00028280260136192.
2. Banerjee, A.V. (1992). A simple model of herd behaviour. The Quarterly Journal of Economics, 107(3), 797-817. DOI: 10.2307/2118364
3. Battiston, S., Domenico, D.G., Gallegati, M., Greenwald, B., & Stiglitz, J.E. (2009). Liaisons dangereuses: Increasing connectivity, risk sharing, and systemic risk. Paper presented at the Eastern Economic Association Meetings, February 27, New York (NBER Working Paper 15611, 1121-1141).
4. Bekaert, G., Harvey, C.R., & Lundblad, C. (2001). Does financial liberalization spur growth? NBER Working Paper 8245, 1-66.
5. Bhanja, N., Samantaraya, A., & Dar, A. B. (2013). Exchange rate volatility and export growth: Post-reform experience of India. Indian Journal of Finance, 7 (9), 27-35.
6. Bhattacharjee, T., & De, S. (2013). Disclosure, foreign institutional investment, and volatility: A study in the Indian context. Indian Journal of Finance, 7(9), 16-26.
7. Gallegati, M., Greenwald, B., Richiardi, M.G., & Stiglitz, J.E. (2008). The asymmetric effect of diffusion process: Risk sharing and contagion. Global Economy Journal, 8 (3), 1-22. DOI: 10.2202/1524-5861.1365
8. Greenwald, B. C., & Stiglitz, J.E. (1986). Externalities in economies with imperfect information and incomplete market. The Quarterly Journal of Economics, 101 (2), 229- 264.
9. Greenwald, B., & Stiglitz, J.E. (2003). Towards a new paradigm in monetary economics. Cambridge: Cambridge University Press.
10. Honohan, P. (2001). How interest rates changed under liberalization: A statistical review. In G. Capiro, P. Honohan, & J.E. Stiglitz (Eds.). Financial liberalization: How far, how fast? (pp. 63-95). Cambridge: Cambridge University Press.
11. Kindleberger, C.P. (2005). Manias, panics and crashes: A history of financial crises (5th ed.) New York: John Wiley & Sons.
12. Newbery, D.M.G., & Stiglitz, J.E. (1984). Pareto inferior trade. The Review of Economic Studies, 51(1), 1-12.
13. Obstfeld, M., & Rogoff, K. (2000). The six major puzzles in international macroeconomics: Is there a common cause? In B. S. Bernanke & K. Rogoff (Eds). NBER Macroeconomics Annual 2000 (pp. 339-390).Cambridge, MA: MIT Press.
14. Rogoff, K., & Prasad, E. (2003, September, 2). The emerging truth of going global. Financial Times, p. 21.
15. Stiglitz, J.E. (1969). A re-examination of the Modigliani-Miller theorem. American Economic Review, 59 (5), 784-793.
16. Stiglitz, J.E. (2004). Capital-market liberalization, globalization, and the IMF. Oxford Review of Economic Policy, 20 (1), 57-71. DOI: 10.1093/oxrep/grh004
17. Stiglitz, J.E. (2009). Freefall. New York: W.W.Norton & Company.
18. Stiglitz, J.E. (2010). Contagion, liberalization, and the optimal structure of globalization. Journal of Globalization & Development, 1 (2), 1-45. DOI: 10.2202/1948-1837.1149
19. Stiglitz, J.E. (2011). Rethinking macroeconomics: What failed, and how to repair it. Journal of European Economic Association, 9 (4), 591-645. DOI: 10.1111/j.1542-4774.2011.01030.x
20. Wyplosz, C. (2002). How risky in financial liberalization in the developing countries? Comparative Economic Studies, 44 (2/3), 1-26.