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The Welfare Cost of Capital Controls

Author

Listed:
  • 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.

Suggested Citation

  • Makin, Tony & Robson, Alexander, 2006. "The Welfare Cost of Capital Controls," Economic Analysis and Policy, Elsevier, vol. 36(1-2), pages 13-24, March/Sep.
  • Handle: RePEc:eee:ecanpo:v:36:y:2006:i:1-2:p:13-24
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    Cited by:

    1. Kuzman, Tanja & Lazarevic, Jelisaveta & Nedeljkovic, Milan, 2022. "Capital flows liberalisation and macroprudential policies: The effects on credit cycles in emerging economies," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 602-619.

    More about this item

    Keywords

    Capital Control; Financial Flow;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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