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Long-Term Capital Reflow Under Macroeconomic Stabilization in Latin America

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  • Béatriz Armendariz de Aghion

Abstract

This paper focuses on the scope for stabilizing Latin American economies to repatriate capital for the financing of long-term investments and economic recovery in the region. In particular, a simple two-period investment model is developed to show that a government seeking capital repatriation may be tempted to introduce investment subsidies on such long-term capital inflows. Typically, however, such a government will be facing the following trade off: small investment subsidies may not be sufficient to attract large-scale repatriation, and high aggregate subsidies may trigger inflationary expectations. A decreasing subsidy scheme is shown to be optimal. Such a scheme has the following properties: it provides an incentive for investors to repatriate their capital early, and at the same time, it keeps government spending low enough not to jeopardize stabilization programmes. A decreasing subsidy scheme could account for the success that the Chilean debt-equity-swap programmes have ...

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Bibliographic Info

Paper provided by OECD Publishing in its series OECD Development Centre Working Papers with number 38.

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Date of creation: Jul 1991
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Handle: RePEc:oec:devaaa:38-en

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