Can Short-Term Capital Controls Promote Capital Inflows?

Abstract

In an economy à la Diamond and Dybvig (1983), we present an example in which foreign lenders find it profitable to invest in an emerging market if, and only if, the emerging market government imposes taxes on short-term capital inflows. This implies that capital controls that are effective in reducing the vulnerability of emerging markets to financial crises may increase the volume of capital inflows.

Keywords: WP, investor, capital control, investors point of view, capital controls, capital inflows, bank runs, herd behavior, emerging market government, long-run return, emerging market to financial crises, financial crisis in Southeast Asia, expected returns of investor, investors' return, Emerging and frontier financial markets, Capital flows, Southeast Asia

JEL Classification: F32, G14, G24, F21, G10, G01