Financial Reforms and Capital Flows: Insights from General Equilibrium

Jaume Ventura and Alberto Martin

No 664, Working Papers from Barcelona School of Economics

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.

Keywords: productivity; economic growth; Capital flows; financial reforms; financial globalization (search for similar items in EconPapers)
JEL-codes: F34 F36 G15 O19 O43 (search for similar items in EconPapers)
Date: 2015-09
New Economics Papers: this item is included in nep-opm
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Citations: View citations in EconPapers (2)

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Related works:
Chapter: Financial Reforms and Capital Flows: Insights from General Equilibrium (2015)
Working Paper: Financial Reforms and Capital Flows: Insights from General Equilibrium (2012)
Working Paper: Financial Reforms and Capital Flows: Insights from General Equilibrium (2012)
Working Paper: Financial reforms and capital flows: Insights from general equilibrium (2012)
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