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Financial Reforms and Capital Flows: Insights from General Equilibrium

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  • Alberto Martin
  • Jaume Ventura

Abstract

As a result of debt enforcement problems, many high-productivity firms in emerging economies are unable to pledge enough future profits to their creditors and this constrains the financing they can raise. Many have argued that, by relaxing these credit constraints, reforms that strengthen enforcement institutions would increase capital flows to emerging economies. This argument is based on a partial equilibrium intuition though, which does not take into account the origin of any additional resources that flow to high-productivity firms after the reforms. We show that some of these resources do not come from abroad, but instead from domestic low-productivity firms that are driven out of business as a result of the reforms. Indeed, the resources released by these low-productivity firms could exceed those absorbed by high-productivity ones so that capital flows to emerging economies might actually decrease following successful reforms. This result provides a new perspective on some recent patterns of capital flows in industrial and emerging economies.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 664.

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Date of creation: Sep 2012
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Handle: RePEc:bge:wpaper:664

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Related research

Keywords: capital flows; financial reforms; productivity; economic growth; financial globalization;

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  1. Kosuke Aoki & Gianluca Benigno & Nobuhiro Kiyotaki, 2010. "Adjusting to Capital Account Liberalization," CEP Discussion Papers dp1014, Centre for Economic Performance, LSE.
  2. Laura Alfaro & Sebnem Kalemli-Ozcan & Vadym Volosovych, 2011. "Sovereigns, Upstream Capital Flows and Global Imbalances," Tinbergen Institute Discussion Papers 11-126/2, Tinbergen Institute.
  3. repec:dgr:uvatin:2011126 is not listed on IDEAS
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  1. Financial reform need not increase capital flows to emerging markets
    by Economic Logician in Economic Logic on 2012-11-06 15:15:00

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