We construct 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. We find 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 fact, cycles are more common in economies with moderate development levels.
Capital Controls, Risk and Liberalization Cycles