The Welfare Cost Of Capital Immobility And Capital Controls

Dr Anthony J. Makin and Alexander Robson
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Alexander Robson: School of Economics, The University of Queensland, https://economics.uq.edu.au/

No 318, Discussion Papers Series from University of Queensland, School of Economics

Abstract: This paper examines the macroeconomic welfare effects of interest risk premia and controls that limit international capital mobility. Using extended loanable funds analysis, it first demonstrates how perfect capital mobility maximises national income, contrary to a prevalent view that it is inimical to economic welfare. As a corollary, the analysis then shows that capital controls, irrespective of their form, generally reduce national income and economic welfare by widening real cross-border interest differentials. Capital controls in the form of quantitative controls, such as the Chilean unremunerated reserve requirement system, and explicit taxes on foreign investment flows impose similar welfare losses. However, quantitative controls are relatively more costly than options to tax capital flows, due to revenue effects.

Date: 2002
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Persistent link: https://EconPapers.repec.org/RePEc:qld:uq2004:318

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