Regulating Capital Flows to Emerging Markets: An Externality View / Anton Korinek.

Format:

Book

Author/Creator:

Korinek, Anton.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w24152.

NBER working paper series no. w24152

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Regulating Capital Flows to Emerging Markets

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2017.

Summary:

We show that capital flows to emerging market economies create externalities that differ by an order of magnitude depending on the state-contingent payoff profile of the flows. Those with pro-cyclical payoffs, such as foreign currency debt, generate substantial negative pecuniary externalities because they lead to large repayments and contractionary exchange rate depreciations during financial crises. Conversely, capital flows with an insurance component, such as FDI or equity, are largely benign. We construct an externality pricing kernel and use sufficient statistics and DSGE model simulations to quantify the externalities that materialized during past financial crises. We find stark differences depending on the payoff profile, justifying taxes of up to 3% for dollar debt but close to zero for FDI. These findings contrast with the existing literature, which has suggested that policymakers should focus on reducing over-borrowing rather than changing the composition of external liabilities.

Notes:

Print version record

December 2017.