Can Short-Term Capital Controls Promote Capital Inflows?

September 1, 1998

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Balance of payments, Capital controls, Capital flows, Capital inflows, Emerging and frontier financial markets, Financial crises, Financial markets

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

Pages:
10
Volume:
1998
DOI:
https://doi.org/10.5089/9781451855258.001
Issue:
131
Series:
Working Paper No. 1998/131
Stock No:
WPIEA1311998
ISBN:
9781451855258
ISSN:
1018-5941

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