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Title: |
Costly Monitoring in Financial Markets and
Capital Outflow Restrictions |
| Author: |
Xu, Bin |
| Author
Affiliation: |
U FL |
| Source: |
International Economic Journal, Summer 1998, v. 12, no. 2, pp. 117-136 |
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Publication Date: |
Summer 1998 |
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Abstract: |
This paper examines welfare implications
of removing capital outflow restrictions in a country whose financial
markets are relatively inefficient in monitoring borrowers. A simple
general equilibrium model is developed in which credit is rationed in
one of the two production sectors due to costly information in financial
markets. Opening to international capital markets is shown to cause an
outflow of domestic wealth but no inflow of foreign credit, leading to
more severe credit rationing. If the domestic investment opportunities
that are unexploited due to credit rationing are sufficiently
profitable, welfare of the country declines after it removes capital
outflow restrictions. |
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