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Private capital flows, capital controls, and default risk

  • Mark L. J. Wright

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 Federal Reserve Bank of San Francisco in its journal Proceedings.

Volume (Year): (2004)
Issue (Month): Jun ()
Pages:

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Handle: RePEc:fip:fedfpr:y:2004:i:jun:x:2
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  1. Jonathan Eaton & Raquel Fernandez, 1995. "Sovereign Debt," NBER Working Papers 5131, National Bureau of Economic Research, Inc.
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  3. Narayana R Kocherlakota & Luigi Pistaferri, 2005. "Asset Pricing Implications of Pareto Optimality with Private Information," Levine's Bibliography 784828000000000507, UCLA Department of Economics.
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  9. Akira Ariyoshi & Andrei Kirilenko & Inci Ötker & Bernard Laurens & Jorge Iván Canales Kriljenko & Karl Friedrich Habermeier, 2000. "Capital Controls; Country Experiences with Their Use and Liberalization," IMF Occasional Papers 190, International Monetary Fund.
  10. Timothy J. Kehoe & David K. Levine, 1992. "Debt constrained asset markets," Working Papers 445, Federal Reserve Bank of Minneapolis.
  11. Patrick J. Kehoe & Fabrizio Perri, 2003. "Competitive equilibria with limited enforcement," Staff Report 307, Federal Reserve Bank of Minneapolis.
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  13. Fernando Alvarez & Urban J. Jermann, 2000. "Efficiency, Equilibrium, and Asset Pricing with Risk of Default," Econometrica, Econometric Society, vol. 68(4), pages 775-798, July.
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