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Private capital flows, capital controls, and default risk

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  • Mark L. J. Wright

Abstract

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.

Suggested Citation

  • Mark L. J. Wright, 2004. "Private capital flows, capital controls, and default risk," Proceedings, Federal Reserve Bank of San Francisco, issue jun.
    • Handle: RePEc:fip:fedfpr:y:2004:i:jun:x:2
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    Cited by:

    1. Castro, Rui & Koumtingué, Nelnan, 2014. "On the individual optimality of economic integration," Journal of Monetary Economics, Elsevier, vol. 68(C), pages 115-135.
    2. Bai, Yan & Zhang, Jing, 2012. "Financial integration and international risk sharing," Journal of International Economics, Elsevier, vol. 86(1), pages 17-32.
    3. Enrique G. Mendoza & Javier Bianchi, 2011. "Overborrowing, Financial Crises and ‘Macro-prudential’ Policy," IMF Working Papers 11/24, International Monetary Fund.
    4. Nelnan Koumtingué & Rui Castro, 2009. "On the Optimality of Economic Integration," 2009 Meeting Papers 1043, Society for Economic Dynamics.
    5. Fernando Broner & Alberto Martin & Jaume Ventura, 2010. "Sovereign Risk and Secondary Markets," American Economic Review, American Economic Association, vol. 100(4), pages 1523-1555, September.
    6. Cristina Arellano & Andrew Atkeson & Mark Wright, 2016. "External and Public Debt Crises," NBER Macroeconomics Annual, University of Chicago Press, vol. 30(1), pages 191-244.
    7. Kehoe, Patrick J. & Perri, Fabrizio, 2004. "Competitive equilibria with limited enforcement," Journal of Economic Theory, Elsevier, vol. 119(1), pages 184-206, November.
    8. Kieran Walsh, 2014. "Portfolio Choice and Partial Default in Emerging Markets: a quantitative analysis," 2014 Meeting Papers 789, Society for Economic Dynamics.
    9. Enrique G. Mendoza & Vivian Z. Yue, 2012. "A General Equilibrium Model of Sovereign Default and Business Cycles," The Quarterly Journal of Economics, Oxford University Press, vol. 127(2), pages 889-946.
    10. Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2014. "Sovereign Default, Domestic Banks, and Financial Institutions," Journal of Finance, American Finance Association, vol. 69(2), pages 819-866, April.
    11. Kim, Yun Jung & Zhang, Jing, 2012. "Decentralized borrowing and centralized default," Journal of International Economics, Elsevier, vol. 88(1), pages 121-133.
    12. Michaud, Amanda & Rothert, Jacek, 2014. "Optimal borrowing constraints and growth in a small open economy," Journal of International Economics, Elsevier, vol. 94(2), pages 326-340.
    13. Catão, Luis A.V. & Milesi-Ferretti, Gian Maria, 2014. "External liabilities and crises," Journal of International Economics, Elsevier, vol. 94(1), pages 18-32.
    14. Seon Tae Kim & Gabriel Mihalache & Yan Bai, 2014. "Maturity and Repayment Structure of Sovereign Debt," 2014 Meeting Papers 523, Society for Economic Dynamics.
    15. Auclert, Adrien & Rognlie, Matthew, 2016. "Unique equilibrium in the Eaton–Gersovitz model of sovereign debt," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 134-146.
    16. Christian Hellwig & Guido Lorenzoni, 2009. "Bubbles and Self-Enforcing Debt," Econometrica, Econometric Society, vol. 77(4), pages 1137-1164, July.
    17. Fernando Broner & Jaume Ventura, 2011. "Globalization and Risk Sharing," Review of Economic Studies, Oxford University Press, vol. 78(1), pages 49-82.
    18. Keskinsoy, Bilal, 2017. "Lucas Paradox in The Long Run," MPRA Paper 78126, University Library of Munich, Germany.
    19. Aguiar, Mark & Amador, Manuel, 2014. "Sovereign Debt," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 647-687, Elsevier.
    20. Gao, Xiang, 2011. "essays in international economics," ISU General Staff Papers 201101010800003244, Iowa State University, Department of Economics.
    21. Gao, Xiang, 2009. "Private Debt with Default Risk within and across Border," MPRA Paper 17126, University Library of Munich, Germany.
    22. Diego J. Perez, 2015. "Sovereign Debt, Domestic Banks and the Provision of Public Liquidity," Discussion Papers 15-016, Stanford Institute for Economic Policy Research.

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    Keywords

    Capital market; Risk;

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