Conference Paper

Private capital flows, capital controls, and default risk

Abstract: What has been the effect of the shift in emerging market capital flows toward private sector borrowers? Are emerging markets capital flows more efficient? If not, can controls on capital flows improve welfare? This paper studies these questions in a world with two forms of default risk. When private loans are enforceable, but there is the risk of national default, constrained efficient capital flows can be decentralized with private borrowing subject to individual borrowing constraints: no capital controls are necessary. However, when private agents may individually default, private lending is inefficient, and capital flow subsidies are potentially Pareto-improving.

Keywords: Capital market; Risk;

Status: Published in Emerging markets and macroeconomic volatility : a conference (2004: June 4-5)

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Proceedings

Publication Date: 2004

Issue: Jun