Private Capital Flows, Capital Controls, and Default Risk
FRB of San Francisco Working Paper No. 2004-34
34 Pages Posted: 18 Apr 2005
Date Written: August 2004
What has been the effect of the shift in emerging market capital flows toward private sector borrowers? Are emerging market capital flows more efficient? If not, can controls on capital flows improve welfare? This paper shows that the answers depend on the form of default risk. When private loans are enforceable, but there is the risk that the government will default on behalf of all residents, private lending is inefficient and capital controls are potentially Pareto-improving. However, when private agents may individually default, capital flow subsidies are potentially Pareto-improving.
Keywords: Capital flows, default, borrowing constraints, capital controls
JEL Classification: F21, F34, F41, O19
Suggested Citation: Suggested Citation