Working Paper: NBER ID: w5727
Authors: Leonardo Bartolini; Allan Drazen
Abstract: We present a model where policies of free capital mobility can signal governments' future policies, but the informativeness of the signal depends on the path of world interest rates. Capital flows to emerging markets reflect investors' perception of these markets' political risk. With low world interest rates, emerging markets experience a capital inflow and engage in a widespread policy of free capital mobility; with higher rates, only sufficiently committed countries allow free capital mobility, whereas others impose controls to trap capital onshore, thus signaling future policies affecting capital mobility. These predictions are consistent with the recent experience of capital flows and policies affecting capital mobility in developing countries.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strong commitment to liberalization (F13) | maintain free capital mobility policies when interest rates rise (O24) |
| simultaneous liberalization in response to external shocks (F41) | potential over-investment in less committed countries (F21) |
| low world interest rates (E43) | capital inflows into emerging markets (F32) |
| capital inflows into emerging markets (F32) | policy of free capital mobility (O24) |
| low world interest rates (E43) | policy of free capital mobility (O24) |