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The Welfare Cost Of Capital Immobility And Capital Controls

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Author Info
Dr Anthony J. Makin ()
Alexander Robson (School of Economics, The University of Queensland)
Abstract

This paper examines the macroeconomic welfare effects of interest risk premia and controls that limit international capital mobility. Using extended loanable funds analysis, it first demonstrates how perfect capital mobility maximises national income, contrary to a prevalent view that it is inimical to economic welfare. As a corollary, the analysis then shows that capital controls, irrespective of their form, generally reduce national income 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.

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Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 318.

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Date of creation: 2002
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Handle: RePEc:qld:uq2004:318

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  1. Sebastian Edwards, 1999. "How Effective are Capital Controls?," NBER Working Papers 7413, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Michael Ulan, 2000. "Review Essay: Is a Chilean-Style Tax on Short-Term Capital Inflows Stabilizing?," Open Economies Review, Springer, vol. 11(2), pages 149-177, April. [Downloadable!] (restricted)
  3. Christopher J. Neely, 1999. "An introduction to capital controls," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 13-30. [Downloadable!]
  4. Bruce, Neil & Purvis, Douglas D., 1985. "The specification and influence of goods and factor markets in open-economy macroeconomic models," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 16, pages 807-857 Elsevier. [Downloadable!] (restricted)
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  5. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June. [Downloadable!] (restricted)
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