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The Welfare Cost Of Capital Immobility And Capital Controls

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This paper examines the macroeconomic welfare effects of interest risk premia and controls that limit international capital mobility. Using extended loanable funds analysis, it first demonstrates how perfect capital mobility maximises national income, contrary to a prevalent view that it is inimical to economic welfare. As a corollary, the analysis then shows that capital controls, irrespective of their form, generally reduce national income and economic welfare by widening real cross-border interest differentials. Capital controls in the form of quantitative controls, such as the Chilean unremunerated reserve requirement system, and explicit taxes on foreign investment flows impose similar welfare losses. However, quantitative controls are relatively more costly than options to tax capital flows, due to revenue effects.

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  • Dr Anthony J. Makin & Alexander Robson, 2002. "The Welfare Cost Of Capital Immobility And Capital Controls," Discussion Papers Series 318, School of Economics, University of Queensland, Australia.
  • Handle: RePEc:qld:uq2004:318
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    File URL: http://www.uq.edu.au/economics/abstract/318.pdf
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    1. Isard,Peter, 1995. "Exchange Rate Economics," Cambridge Books, Cambridge University Press, number 9780521466004, April.
    2. Michael Ulan, 2000. "Review Essay: Is a Chilean-Style Tax on Short-Term Capital Inflows Stabilizing?," Open Economies Review, Springer, vol. 11(2), pages 149-177, April.
    3. Graciela L. Kaminsky & Carmen M. Reinhart, 2001. "Bank Lending and Contagion: Evidence from the Asian Crisis," NBER Chapters,in: Regional and Global Capital Flows: Macroeconomic Causes and Consequences, NBER-EASE Volume 10, pages 73-99 National Bureau of Economic Research, Inc.
    4. G. D. A. MacDougall, 1960. "THE BENEFITS and COSTS OF PRIVATE INVESTMENT FROM ABROAD: A THEORETICAL APPROACH," The Economic Record, The Economic Society of Australia, vol. 36(73), pages 13-35, March.
    5. Bruce, Neil & Purvis, Douglas D., 1985. "The specification and influence of goods and factor markets in open-economy macroeconomic models," Handbook of International Economics,in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 16, pages 807-857 Elsevier.
    6. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-329, June.
    7. J. E. Stiglitz, 1999. "Introduction," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 28(3), pages 249-254, November.
    8. Sebastian Edwards, 1999. "How Effective Are Capital Controls?," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 65-84, Fall.
    9. Isard,Peter, 1995. "Exchange Rate Economics," Cambridge Books, Cambridge University Press, number 9780521460477, April.
    10. Christopher J. Neely, 1999. "An introduction to capital controls," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 13-30.
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