Working Paper: CEPR ID: DP2011
Authors: Tito Cordelia
Abstract: 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.
Keywords: capital controls; capital inflows; bank runs; herd behaviour
JEL Codes: F32; G14; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Taxes on short-term capital inflows (F38) | prevent bank runs (E44) |
| prevent bank runs (E44) | increase expected returns (G11) |
| Taxes on short-term capital inflows (F38) | increase expected returns (G11) |
| reduction of vulnerability to financial crises (F65) | increase capital supply (E22) |