International Equity and Debt Flows to Emerging Market Economies: Composition, Crises, and Controls

70 Pages Posted: 27 Feb 2021

See all articles by Chang Ma

Chang Ma

Fudan University - Fanhai International School of Finance (FISF)

Shang-Jin Wei

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: December 29, 2020

Abstract

Standard models of capital flows to emerging market economies focus on debt flows and a pecuniary externality. However, by offering better risk sharing, international equity flows can render such externality unimportant, yet many economies fail to attract equity investment in a large quantity. We propose a theory of endogenous composition of capital flows that highlights two asymmetries. 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. Somewhat surprisingly, a social planner would often impose taxes on both equity and debt inflows. Our story differs in important ways from an alternative narrative focusing on collateral constraint.

Keywords: Capital Controls, Institutional Quality

JEL Classification: F38, F41, G18

Suggested Citation

Ma, Chang and Wei, Shang-Jin, International Equity and Debt Flows to Emerging Market Economies: Composition, Crises, and Controls (December 29, 2020). Available at SSRN: https://ssrn.com/abstract=3756652 or http://dx.doi.org/10.2139/ssrn.3756652

Chang Ma (Contact Author)

Fudan University - Fanhai International School of Finance (FISF) ( email )

China

Shang-Jin Wei

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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