Article | Review of International Economics | August 2004

Capital Controls, Risk and Liberalization Cycles

by Laura Alfaro and Fabio Kanczuk

Abstract

The paper presents an overlapping-generations model where agents vote on whether to open or close the economy to international capital flows. Political decisions are shaped by the risk over capital and labor returns. In an open economy, the capitalists (old) completely hedge their savings income. In contrast, in a closed economy, the workers (young) partially insulate wages from the productivity shocks.There are three possible equilibrium outcomes: economies that eventually remain open; those that eventually remain closed; and those that cycle between open and closed. In line with the stylized facts, cycles are more common in economies with intermediate development levels.

Keywords: Business Cycles; Development Economics; Voting; Risk and Uncertainty; Cash Flow; Saving; Investment; Economy; Wages;

Citation:

Alfaro, Laura, and Fabio Kanczuk. "Capital Controls, Risk and Liberalization Cycles." Review of International Economics 12, no. 3 (August 2004).