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Costly Monitoring in Financial Markets and Capital Outflow Restrictions

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  • Xu Bin
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    Abstract

    This paper examines welfare implications of removing capital outflow restrictions in a country whose financial markets are relatively inefficient in monitoring borrowers. A simple general equilibrium model is developed in which credit is rationed in one of the two production sectors due to costly information in financial markets. Opening to international capital markets is shown to cause an outflow of domestic wealth but no inflow of foreign credit, leading to more severe credit rationing. If the domestic investment opportunities that are unexploited due to credit rationing are sufficiently profitable, welfare of the country declines after it removes capital outflow restrictions. [O16]

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/10168739800000017
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    Bibliographic Info

    Article provided by Korean International Economic Association in its journal International Economic Journal.

    Volume (Year): 12 (1998)
    Issue (Month): 2 ()
    Pages: 117-136

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    Handle: RePEc:taf:intecj:v:12:y:1998:i:2:p:117-136

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    1. Gertler, Mark, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(3), pages 559-88, August.
    2. Boyd, John H. & Smith, Bruce D., 1992. "Intermediation and the equilibrium allocation of investment capital : Implications for economic development," Journal of Monetary Economics, Elsevier, vol. 30(3), pages 409-432, December.
    3. Boyd, John H & Smith, Bruce D, 1994. "How Good Are Standard Debt Contracts? Stochastic versus Nonstochastic Monitoring in a Costly State Verification Environment," The Journal of Business, University of Chicago Press, vol. 67(4), pages 539-61, October.
    4. N. Gregory Mankiw, 1986. "The Allocation of Credit and Financial Collapse," NBER Working Papers 1786, National Bureau of Economic Research, Inc.
    5. Stephen D. Williamson, 1984. "Costly Monitoring, Loan Contracts and Equilibrium Credit Rationing," Working Papers 572, Queen's University, Department of Economics.
    6. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
    7. Stephen D. Williamson, 1984. "Costly Monitoring, Financial Intermediation, and Equilibrium Credit Rationing," Working Papers 583, Queen's University, Department of Economics.
    8. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    9. Innes, Robert, 1991. "Investment and government intervention in credit markets when there is asymmetric information," Journal of Public Economics, Elsevier, vol. 46(3), pages 347-381, December.
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