Barriers to international capital flows: who should erect them and how big should they be?
Until recently, the trend in world capital markets has been toward increasing globalization. Recent events in Latin America and Asia have caused many in policy-making circles to question whether this trend should be wholly, or at least partially, reversed. It is commonly argued that—at a minimum—countries should be given the discretion to erect such barriers, at least in certain circumstances. Recent events, then, have forced a rethinking of the desirability of unrestricted world capital flows. The general presumption appears to be that the "victims" of highly volatile capital flows should be allowed to limit or restrict inflows and outflows of funds. But outflows of funds from smaller and less developed economies often represent inflows of funds to larger and more developed economies. This raises the issue of whether there would be benefits associated with larger and wealthier economies taking actions to limit capital mobility. This paper presents a formal analysis of erecting barriers to international capital flows. We find that, in contrast to conventional thinking, when there are substantial differences in per capita GDP across countries, long-run output in all countries can be increased by having wealthier economies erect some partial barriers to capital mobility. Interestingly, wealthier economies need not persuade poorer economies to cooperate: by implementing an appropriately selected tax on capital flows it will often be the case that the wealthy economy can unilaterally obtain a higher steady state welfare level for all agents in all economies. We also show that these same barriers need not eliminate endogenously arising volatility in income, capital flows, and asset returns. Under some circumstances, then, if it is desirable to reduce such volatility, this must be accomplished by other means. However, and this bears emphasis, the case for imposing barriers on capital flows does not depend critically on the ability of these barriers to eliminate excess volatility.
|Date of creation:||1999|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.frbatlanta.org/
More information through EDIRC
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bruce D. Smith & John H. Boyd, 1998. "Capital market imperfections in a monetary growth model," Economic Theory, Springer, vol. 11(2), pages 241-273.
- Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
- Boyd, John H & Smith, Bruce D, 1994. "How Good Are Standard Debt Contracts? Stochastic versus Nonstochastic Monitoring in a Costly State Verification Environment," The Journal of Business, University of Chicago Press, vol. 67(4), pages 539-61, October.
- Boyd, John H. & Smith, Bruce D., 1997. "Capital Market Imperfections, International Credit Markets, and Nonconvergence," Journal of Economic Theory, Elsevier, vol. 73(2), pages 335-364, April.
- Williamson, Stephen D, 1987.
"Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing,"
The Quarterly Journal of Economics,
MIT Press, vol. 102(1), pages 135-45, February.
- Stephen D. Williamson, 1984. "Costly Monitoring, Loan Contracts and Equilibrium Credit Rationing," Working Papers 572, Queen's University, Department of Economics.
- Eichengreen, Barry & Tobin, James & Wyplosz, Charles, 1995.
"Two Cases for Sand in the Wheels of International Finance,"
Royal Economic Society, vol. 105(428), pages 162-72, January.
- Barry Eichengreen, James Tobin, and Charles Wyplosz., 1994. "Two Cases for Sand in the Wheels of International Finance," Center for International and Development Economics Research (CIDER) Working Papers C94-045, University of California at Berkeley.
- Stephen D. Williamson, 1984.
"Costly Monitoring, Financial Intermediation, and Equilibrium Credit Rationing,"
583, Queen's University, Department of Economics.
- Williamson, Stephen D., 1986. "Costly monitoring, financial intermediation, and equilibrium credit rationing," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 159-179, September.
- Gertler, Mark & Rogoff, Kenneth, 1990. "North-South lending and endogenous domestic capital market inefficiencies," Journal of Monetary Economics, Elsevier, vol. 26(2), pages 245-266, October.
- Elisabeth Huybens & Bruce D. Smith, 1996.
"Financial Market Frictions, Monetary Policy and Capital Accumulation in a Small Open Economy,"
9608, Centro de Investigacion Economica, ITAM.
- Huybens, Elisabeth & Smith, Bruce D., 1998. "Financial Market Frictions, Monetary Policy, and Capital Accumulation in a Small Open Economy," Journal of Economic Theory, Elsevier, vol. 81(2), pages 353-400, August.
- Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
When requesting a correction, please mention this item's handle: RePEc:fip:fedawp:99-6. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Meredith Rector)
If references are entirely missing, you can add them using this form.