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Capital Controls: a Political Economy Approach


  • Laura Alfaro


The paper examines the economic consequences of political conflicts that arise when countries implement capital controls. In an overlapping-generations model, agents vote on whether to open or close an economy to capital flows. The young (workers) receive income only from wages while the old (capitalists) receive income only from savings. The authors characterize the set of stationary equilibria for an infinite-horizon game. Assuming dynamic efficiency, when the median representative is a worker (capitalist), capital-importing countries will open (close) while capital-exporting countries will close (open). These predicted patterns are consistent with data on liberalization policies over time and across various countries. Copyright Blackwell Publishing Ltd 2004.

Suggested Citation

  • Laura Alfaro, 2004. "Capital Controls: a Political Economy Approach," Review of International Economics, Wiley Blackwell, vol. 12(4), pages 571-590, September.
  • Handle: RePEc:bla:reviec:v:12:y:2004:i:4:p:571-590

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    References listed on IDEAS

    1. 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.
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    Cited by:

    1. Lai, Ching-chong & Fang, Chung-rou & Chang, Juin-jen, 2008. "Volatility trade-offs in exchange rate target zones," International Review of Economics & Finance, Elsevier, vol. 17(3), pages 366-379.
    2. Axel Dreher & Lars-H.R. Siemers, 2003. "The Intriguing Nexus Between Corruption and Capital Account Restrictions," Development and Comp Systems 0306004, EconWPA, revised 07 Jul 2005.
    3. Philipp Engler & Alexander Wulff, 2014. "Opposition to capital market opening," Applied Economics Letters, Taylor & Francis Journals, vol. 21(6), pages 425-428, April.
    4. Campos, Nauro F & De Grauwe, Paul & Ji, Yuemei, 2017. "Structural Reforms, Growth and Inequality: An Overview of Theory, Measurement and Evidence," IZA Discussion Papers 11159, Institute for the Study of Labor (IZA).
    5. Mouna Gammoudi & Mondher Cherif, 2014. "Threshold Effects in the Capital Account Liberalization and Foreign Direct Investment Relationship," Working Papers 877, Economic Research Forum, revised Nov 2014.
    6. Kevin P. Gallagher, 2010. "Policy Space to Prevent and Mitigate Financial Crises in Trade and Investment Agreements," G-24 Discussion Papers 58, United Nations Conference on Trade and Development.
    7. Nauro F. Campos & Paul De Grauwe & Yuemei Ji, 2017. "Structural Reforms, Growth and Inequality: An Overview of Theory, Measurement and Evidence," CESifo Working Paper Series 6812, CESifo Group Munich.
    8. Carro Fernandez, Martha, 2007. "Welcoming Foreign Direct Investment? A Political Economy Approach to FDI Policies in Argentina and Brazil," MPRA Paper 47252, University Library of Munich, Germany.

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