Private Capital Flows, Capital Controls, and Default Risk

FRB of San Francisco Working Paper No. 2004-34

34 Pages Posted: 18 Apr 2005

See all articles by Mark L. J. Wright

Mark L. J. Wright

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Date Written: August 2004

Abstract

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

Wright, Mark L.J., Private Capital Flows, Capital Controls, and Default Risk (August 2004). FRB of San Francisco Working Paper No. 2004-34. Available at SSRN: https://ssrn.com/abstract=700749 or http://dx.doi.org/10.2139/ssrn.700749

Mark L.J. Wright (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

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