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The Welfare Cost of Capital Controls

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Author Info

  • Makin, Tony

    (Griffith Business School, Griffith University, Gold Coast (Australia))

  • Robson, Alexander

    (Faculty of Economics and Commerce, The Australian National University, Canberra (Australia))

Abstract

This paper examines the macroeconomic implications of capital controls that limit international financial flows to emerging economies. Using extended loanable funds analysis, it first demonstrates how perfect capital mobility contributes to development, contrary to a prevalent view that international borrowing inimical to the economic welfare of developing economies. As a corollary, the analysis then shows that capital controls, irrespective of form, generally reduce development potential and economic welfare by widening real cross-border interest differentials. Capital controls in the form of quantitative controls, such as the Chilean unremunerated reserve requirement system, and explicit taxes on foreign investment flows impose similar welfare losses. However, quantitative controls are relatively more costly than options to tax capital flows, due to revenue effects.

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Bibliographic Info

Article provided by Queensland University of Technology (QUT), School of Economics and Finance in its journal Economic Analysis and Policy (EAP).

Volume (Year): 36 (2006)
Issue (Month): 1-2 (March/September)
Pages: 13-24

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Handle: RePEc:eap:articl:v:36:y:2006:i:1-2:p:13-24

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Related research

Keywords: Capital Control; Financial Flow;

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References

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  1. G. D. A. MacDougall, 1960. "THE BENEFITS and COSTS OF PRIVATE INVESTMENT FROM ABROAD: A THEORETICAL APPROACH," The Economic Record, The Economic Society of Australia, vol. 36(73), pages 13-35, 03.
  2. Michael Ulan, 2000. "Review Essay: Is a Chilean-Style Tax on Short-Term Capital Inflows Stabilizing?," Open Economies Review, Springer, vol. 11(2), pages 149-177, April.
  3. Alesina, Alberto F & Grilli, Vittorio & Milesi-Ferretti, Gian Maria, 1993. "The Political Economy of Capital Controls," CEPR Discussion Papers 793, C.E.P.R. Discussion Papers.
  4. Beck, Thorsten & Levine, Ross & Loayza, Norman, 1999. "Finance and the sources of growth," Policy Research Working Paper Series 2057, The World Bank.
  5. Reuven Glick & Ramon Moreno & Mark Spiegel, 2001. "Financial crises in emerging markets," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar.23.
  6. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  7. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37, August.
  8. Christopher J. Neely, 1999. "An introduction to capital controls," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 13-30.
  9. Reinhart, Carmen & Kaminsky, Graciela, 2001. "Bank Lending and Contagion: Evidence from the Asian Crisis," MPRA Paper 7580, University Library of Munich, Germany.
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