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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.

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  • 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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    5. Karsten Jeske, 2005. "Private international debt with risk of repudiation," FRB Atlanta Working Paper 2001-16, Federal Reserve Bank of Atlanta.
    6. Kehoe, Patrick J. & Perri, Fabrizio, 2004. "Competitive equilibria with limited enforcement," Journal of Economic Theory, Elsevier, vol. 119(1), pages 184-206, November.
    7. Mr. Akira Ariyoshi & Mr. Andrei A Kirilenko & Ms. Inci Ötker & Mr. Bernard J Laurens & Mr. Jorge I Canales Kriljenko & Mr. Karl F Habermeier, 2000. "Capital Controls: Country Experiences with Their Use and Liberalization," IMF Occasional Papers 2000/009, International Monetary Fund.
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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. Kehoe, Patrick J. & Perri, Fabrizio, 2004. "Competitive equilibria with limited enforcement," Journal of Economic Theory, Elsevier, vol. 119(1), pages 184-206, November.
    3. Enrique G. Mendoza & Vivian Z. Yue, 2012. "A General Equilibrium Model of Sovereign Default and Business Cycles," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(2), pages 889-946.
    4. Fernando Broner & Jaume Ventura, 2011. "Globalization and Risk Sharing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(1), pages 49-82.

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