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Capital Controls: a Political Economy Approach

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  • Laura Alfaro

Abstract

The paper examines the economic consequences of political conflicts that arise when countries implement capital controls. In an overlapping‐generations model, agents vote on whether to open or close an economy to capital flows. The young (workers) receive income only from wages while the old (capitalists) receive income only from savings. The authors characterize the set of stationary equilibria for an infinite‐horizon game. Assuming dynamic efficiency, when the median representative is a worker (capitalist), capital‐importing countries will open (close) while capital‐exporting countries will close (open). These predicted patterns are consistent with data on liberalization policies over time and across various countries.

Suggested Citation

  • Laura Alfaro, 2004. "Capital Controls: a Political Economy Approach," Review of International Economics, Wiley Blackwell, vol. 12(4), pages 571-590, September.
  • Handle: RePEc:bla:reviec:v:12:y:2004:i:4:p:571-590
    DOI: 10.1111/j.1467-9396.2004.00468.x
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    References listed on IDEAS

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    1. Helpman, Elhanan, 1995. "Politics and Trade Policy," Foerder Institute for Economic Research Working Papers 275606, Tel-Aviv University > Foerder Institute for Economic Research.
    2. Michael P. Dooley, 1995. "A Survey of Academic Literature on Controls over International Capital Transactions," NBER Working Papers 5352, National Bureau of Economic Research, Inc.
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    Cited by:

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    2. Lai, Ching-chong & Fang, Chung-rou & Chang, Juin-jen, 2008. "Volatility trade-offs in exchange rate target zones," International Review of Economics & Finance, Elsevier, vol. 17(3), pages 366-379.
    3. Binici, Mahir & Das, Mitali, 2021. "Recalibration of capital controls: Evidence from the IMF taxonomy," Journal of International Money and Finance, Elsevier, vol. 110(C).
    4. Nicolas Gavoille & Katharina Hofer, 2021. "Capital Controls and Electoral Cycles," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 69(2), pages 275-324, June.
    5. Makram El‐Shagi & Steven J. Yamarik, 2021. "IMF conditionality and capital controls: Capital account liberalization to capital inflow management?," Review of International Economics, Wiley Blackwell, vol. 29(3), pages 590-605, August.
    6. Axel Dreher & Lars-H.R. Siemers, 2003. "The Intriguing Nexus Between Corruption and Capital Account Restrictions," Development and Comp Systems 0306004, University Library of Munich, Germany, revised 07 Jul 2005.
    7. Philipp Engler & Alexander Wulff, 2014. "Opposition to capital market opening," Applied Economics Letters, Taylor & Francis Journals, vol. 21(6), pages 425-428, April.
    8. Nauro F. Campos & Paul De Grauwe & Yuemei Ji, 2017. "Structural Reforms, Growth and Inequality: An Overview of Theory, Measurement and Evidence," CESifo Working Paper Series 6812, CESifo.
    9. Kevin P. Gallagher, 2010. "Policy Space to Prevent and Mitigate Financial Crises in Trade and Investment Agreements," G-24 Discussion Papers 58, United Nations Conference on Trade and Development.
    10. Carro Fernandez, Martha, 2007. "Welcoming Foreign Direct Investment? A Political Economy Approach to FDI Policies in Argentina and Brazil," MPRA Paper 47252, University Library of Munich, Germany.

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