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The Effects of Capital Controls on International Capital Flows in the Presence of Asymmetric Information

By Rebecca M. Neumann


Recent attention has focused on the use of capital controls to mitigate possibly detrimental impacts of international capital flows to developing countries. This paper examines the effects of capital controls on the volume and composition of international capital flows in the presence of asymmetric information. A two-period, small open economy model is developed in which stochastic, second-period output depends on the level of first-period investment. Asymmetric information between domestic agents and international financiers implies that domestic agents cannot credibly commit to a given level of investment in the first period. Domestic agents obtain external funding by borrowing on international capital markets and by selling equity to international investors. The paper investigates the effects of various capital controls, modeled as taxes on capital inflows, on the debt-equity choice, as well as the impact on domestic investment and welfar

Year: 2000
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