Stagflation and Topsy-Turvy Capital Flows

Julien Bengui and Louphou Coulibaly

No 795, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: Are unregulated capital flows excessive during a stagflation episode? We argue that they likely are, owing to a macroeconomic externality operating through the economy’s supply side. Inflows raise domestic wages through a wealth effect on labor supply and cause unwelcome upward pressure on marginal costs in countries where monetary policy is trying to drive down costs to stabilize inflation. Yet, market forces are likely to generate such inflows. Optimal capital flow management instead requires net outflows, suggesting topsy-turvy capital flows following markup shocks.

Keywords: Stabilization policy; Capital flow management; Macroeconomic externalities; Stagflation; Current account adjustment (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 F32 F41 F42 (search for similar items in EconPapers)
Date: 2023-01-26
New Economics Papers: this item is included in nep-mon and nep-opm
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Working Paper: Stagflation and Topsy-Turvy Capital Flows (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:95580

DOI: 10.21034/wp.795

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