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Private capital flows, capital controls, and default risk

  • Wright, Mark L.J.

What has been the effect of the shift in emerging market capital flows toward private sector borrowers? Are emerging markets capital flows more efficient? If not, can controls on capital flows improve welfare? This paper studies these questions in a world with two forms of default risk. When private loans are enforceable, but there is the risk of national default, constrained efficient capital flows can be decentralized with private borrowing subject to individual borrowing constraints: no capital controls are necessary. However, when private agents may individually default, private lending is inefficient, and capital flow subsidies are potentially Pareto-improving.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 69 (2006)
Issue (Month): 1 (June)
Pages: 120-149

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Handle: RePEc:eee:inecon:v:69:y:2006:i:1:p:120-149
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  1. Kletzer, Kenneth M. & Wright, Brian D., 1998. "Sovereign Debt as Intertemporal Barter," Center for International and Development Economics Research, Working Paper Series qt4qg3c42v, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
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