Until recently, the trend in world capital markets has been toward increasing “globalization.” Recent events in Latin America and Asia have forced a rethinking of the desirability of unrestricted world capital flows. In this paper we ask whether simple restrictions on capital mobility can succeed in reducing the volatility of funds flows, whether such restrictions are consistent with the long-term development of the countries that might impose them, whether such restrictions are beneficial for poorer countries while harming wealthier countries, and whether barriers to capital movements should be reduced in magnitude as the development process proceeds.
We find first that appropriately selected barriers to capital movements can be used by a poorer country to eliminate the short-term volatility of capital flows and other economic volatility as well. Second, we find that these barriers are consistent with increased rather than reduced levels of economic development in both the short and long run. Third, we show that it is empirically plausible that such barriers will be reduced over time as economies develop. Fourth, we show that, in the long run, all countries can benefit from the presence of barriers to capital mobility. And, fifth, we show that barriers to capital mobility can increase the magnitude of net capital flows in a steady state.
JEL classification: F21, F34, G18
Key words: barriers, international capital flows, volatility
The authors gratefully acknowledge comments by seminar participants at a number of workshops. They also thank two anonymous referees for their very insightful comments. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.
Please address questions regarding content to Marco A. Espinosa-Vega, Research Department, Federal Reserve Bank of Atlanta, 104 Marietta Street, N.W., Atlanta, Georgia 30303-2713, 404-498-8630, firstname.lastname@example.org; Bruce D. Smith, Department of Economics, University of Texas at Austin, Austin, Texas 78712, 512-475-8548, 512-471-3510 (fax); or Chong K. Yip, Department of Economics, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong, 852-26097057, email@example.com.
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