University of Macau Library

Author: Gu, Xinhua; Li, Sheng
Title: Externalities of capital flows and justifications for capital controls
Journal Name: Euro Asia Journal of Management
Pub. Info: Jun. 2009, Vol.19, No.1, pp. 13-26
Abstract: Abstract : This paper discusses some significant facts about negative externalities generated by free capital flows, and analyzes certain justications for the use of capital controls as an efficiency-enhancing tool to limit the external costs. This intervention tool, imperfect though it is, can limit the deviation of private equilibrium from social optimization by improving the composition of capital flows and alleviating their distorted incentive for externality creation. To avoid financial turbulence or economic crises, we urge emerging-market economies such as China to stay away from the damaging influences of free-market ideology and seriously reconsider the merits of capital controls. Paragraph Headings: 1. Indroduction 2. Externalities and social optimization 3. Empirical observations on externalities 4. Merits of capital controls 5. Concluding remarks Tables: 1. The key economic indicators of the Asia-crisis countries(%) 2. The real estate prices and vacancy rates in major Chinese cities Figures: 1. Welfare loss due to negative externalities of free capital flows 2. The mix of capital flows improved by capital controls 3. Vacancy rates in Bangkok(%)