4 theories of capital flows

I have written a number of posts on the capital flows (the allocation puzzle, capital controls, IMF’s analysis, Rogoff’s view etc). These papers have a single viewpoint and they provide evidence on the same.

However, this excellent paper from Barry Eichengreen summarises all on capital flows in form of 4 schools:

1. Neoclassical school: It believes in basic economics argument that capital flows from low return avenues to high returns. However, what we find is opposite as capital flows from emerging markets (where returns are high) to developed (where returns are low)? So, people believing/criticising this school explain why this happens.

2. Corollary School: It believes capital flows may not have direct benefits but indirect ones like it leads to better corporate governance, deepening of financial markets, better institutions etc. I have discussed this view here.

3. Anti capital Flows: This believes capital flows are damaging to an economy and should at best be restricted. The other way of looking at this school is that it is important to get the sequencing of reforms in fin sector right

4. Asian view:This school believes managing capital flows is tough and looks at possible ways to minimise the problems from capital flows.

He then summarises the key findings in each school and suggests policies for Asian countries that are experiencing huge capital flows. The advice is common – get sequencing right, flexible exchange rates, fiscal prudence etc.

Overall a very good read.

One Response to “4 theories of capital flows”

  1. Managing India’s capital account « Mostly Economics Says:

    […] speech for more details. And yes, the empirical research he mentions I have covered it earlier here.  So, now you know I have been advising you to read the right […]

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