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Capital Controls, Risk, and Liberalization Cycles

  • Laura Alfaro
  • Fabio Kanczuk

The paper presents an overlapping-generations model where agents vote on whether to open or close the economy to international capital flows. Political decisions are shaped by the risk over capital and labor returns. In an open economy, the capitalists (old) completely hedge their savings income. In contrast, in a closed economy, the workers (young) partially insulate wages from the productivity shocks. There are three possible equilibrium outcomes: economies that eventually remain open; those that eventually remain closed; and those that cycle between open and closed. In line with the stylized facts, cycles are more common in economies with intermediate development levels. Copyright Blackwell Publishing Ltd 2004.

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Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 12 (2004)
Issue (Month): 3 (08)
Pages: 412-434

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Handle: RePEc:bla:reviec:v:12:y:2004:i:3:p:412-434
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  1. Maurice Obstfeld & Alan M. Taylor, 1998. "The Great Depression as a Watershed: International Capital Mobility over the Long Run," NBER Chapters, in: The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, pages 353-402 National Bureau of Economic Research, Inc.
  2. Vittorio Grilli & Gian Maria Milesi-Ferretti, 1995. "Economic Effects and Structural Determinants of Capital Controls," IMF Staff Papers, Palgrave Macmillan, vol. 42(3), pages 517-551, September.
  3. World Bank, 2000. "World Development Indicators 2000," World Bank Publications, The World Bank, number 13828, September.
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  5. Michael Mussa & Giovanni Dell'Ariccia & Barry J. Eichengreen & Enrica Detragiache, 1998. "Capital Account Liberalization; Theoretical and Practical Aspects," IMF Occasional Papers 172, International Monetary Fund.
  6. Carmen M. Reinhart & R. Todd Smith, 2001. "Temporary Controls on Capital Inflows," NBER Working Papers 8422, National Bureau of Economic Research, Inc.
  7. Rodrik, Dani & van Ypersele, Tanguy, 2001. "Captial mobility, distributive conflict and international tax coordination," Journal of International Economics, Elsevier, vol. 54(1), pages 57-73, June.
  8. Michael P. Dooley, 1995. "A Survey of Academic Literature on Controls over International Capital Transactions," NBER Working Papers 5352, National Bureau of Economic Research, Inc.
  9. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, June.
  10. Helpman, Elhanan, 1995. "Politics and Trade Policy," CEPR Discussion Papers 1269, C.E.P.R. Discussion Papers.
  11. Maurice Obstfeld, 1998. "The Global Capital Market: Benefactor or Menace?," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 9-30, Fall.
  12. Mayer, Wolfgang, 1984. "Endogenous Tariff Formation," American Economic Review, American Economic Association, vol. 74(5), pages 970-85, December.
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