International Equity and Debt Flows to Emerging Market Economies: Composition, Crises, and Controls
73 Pages Posted: 27 Feb 2021 Last revised: 18 Nov 2021
Date Written: December 29, 2020
Standard models of capital flows to emerging market economies focus on debt flows and a pecuniary externality. Equity flows, by offering better risk sharing, can render such externality unimportant, yet many economies fail to attract a significant amount of international equity investment. We propose a theory of endogenous composition of capital flows in which poor institutional quality leads to an inefficiently low equity share and an inefficiently high volume of total inflows. Interestingly, a planner would impose a tax on both debt and equity inflows. Our story differs in important ways from an alternative narrative focusing on collateral constraint.
Keywords: Capital Controls, Institutional Quality
JEL Classification: F38, F41, G18
Suggested Citation: Suggested Citation