The Welfare Cost Of Capital Immobility And Capital Controls

Makin, Anthony J. and Robson, Alexander (2002) The Welfare Cost Of Capital Immobility And Capital Controls. Discussion Paper No 318, School of Economics, The University of Queensland.

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Author Makin, Anthony J.
Robson, Alexander
Title The Welfare Cost Of Capital Immobility And Capital Controls
School, Department or Centre School of Economics
Institution The University of Queensland
Open Access Status Other
Report Number Discussion Paper No 318
Publication date 2002-11-01
Subject 340203 Finance Economics
340210 Welfare Economics
Abstract/Summary 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.
Keyword Capital mobility
Capital controls
Foreign investment
National income
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Created: Thu, 05 Feb 2004, 10:00:00 EST