International Equity and Debt Flows: Composition, Crisis, and Controls
NBER Working Paper No. 27129
We propose a theory of endogenous composition of capital flows that highlights two asymmetries between international equity and debt financing. In our model, poor institutional quality leads to an inefficiently low share of equity financing as well as an inefficiently high volume of total inflows. The required optimal capital controls naturally become looser as a country's institutional quality improves. Our story differs in important ways from an alternative narrative focusing on collateral constraint.
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Document Object Identifier (DOI): 10.3386/w27129