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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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18454.

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Date of creation: Oct 2012
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Handle: RePEc:nbr:nberwo:18454

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  1. repec:dgr:uvatin:2011126 is not listed on IDEAS
  2. Laura Alfaro & Sebnem Kalemli-Ozcan & Vadym Volosovych, 2011. "Sovereigns, Upstream Capital Flows and Global Imbalances," Tinbergen Institute Discussion Papers, Tinbergen Institute 11-126/2, Tinbergen Institute.
  3. Aoki, Kosuke & Benigno, Gianluca & Kiyotaki, Nobuhiro, 2010. "Adjusting to Capital Account Liberalization," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8087, C.E.P.R. Discussion Papers.
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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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