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  • The Welfare Cost of Capital Controls

    Author(s)
    Makin, Tony
    Robson, Alex
    Griffith University Author(s)
    Makin, Tony J.
    Robson, Alex
    Year published
    2006
    Metadata
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    Abstract
    This paper examines the macroeconomic implications of capital controls that limit international financial flows to emerging economies. Using extended loanable funds analysis, it first demonstrates how perfect capital mobility contributes to development, contrary to a prevalent view that international borrowing is inimical to the economic welfare of developing economies. As a corollary, the analysis then shows that capital controls, irrespective of form, generally reduce development potential and economic welfare by widening real cross-border interest differentials. Capital controls in the form of quantitative controls, ...
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    This paper examines the macroeconomic implications of capital controls that limit international financial flows to emerging economies. Using extended loanable funds analysis, it first demonstrates how perfect capital mobility contributes to development, contrary to a prevalent view that international borrowing is inimical to the economic welfare of developing economies. As a corollary, the analysis then shows that capital controls, irrespective of form, generally reduce development potential 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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    Journal Title
    Economic Analysis and Policy
    Volume
    36
    Issue
    1 & 2
    Subject
    Economics
    Publication URI
    http://hdl.handle.net/10072/13912
    Collection
    • Journal articles

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