DP2011 Can Short-Term Capital Controls Promote Capital Inflows

Author(s): Tito Cordella
Publication Date: November 1998
Keyword(s): bank runs, Capital Controls, Capital Inflows, Herd Behaviour
JEL(s): F32, G14, G24
Programme Areas: International Macroeconomics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2011

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.