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Title: Financial Reforms and Capital Flows: Insights from General Equilibrium

Author(s): Alberto Mart�n and Jaume Ventura

Publication Date: October 2012

Keyword(s): capital flows, economic growth, financial globalization, financial reforms and productivity

Programme Area(s): Financial Economics and International Macroeconomics

Abstract: As a result of debt enforcement problems, many high-productivity firms in emerging economies are unable to pledge enough future profits to their creditors and this constrains the financing they can raise. Many have argued that, by relaxing these credit constraints, reforms that strengthen enforcement institutions would increase capital flows to emerging economies. This argument is based on a partial equilibrium intuition though, which does not take into account the origin of any additional resources that flow to high-productivity firms after the reforms. We show that some of these resources do not come from abroad, but instead from domestic low-productivity firms that are driven out of business as a result of the reforms. Indeed, the resources released by these low-productivity firms could exceed those absorbed by high-productivity ones so that capital flows to emerging economies might actually decrease following successful reforms. This result provides a new perspective on some recent patterns of capital flows in industrial and emerging economies.

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Bibliographic Reference

Mart�n, A and Ventura, J. 2012. 'Financial Reforms and Capital Flows: Insights from General Equilibrium'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9174