The mainstream economics on capital account liberalization and capital controls: New evidence and theoretical reorientation

Abstract

The mainstream studies on capital accounts underwent important changes over the last three decades. Starting from the theoretical models that grounded full capital account liberalization, the financial crises that hit emerging markets in the 1990s and then the global financial crisis that broke out in 2008 showed several dysfunctions of financial globalization. In addition, the post-global crisis period provided new evidence on the effectiveness of regulation measures. In response to much evidence contradicting the earlier ex ante models, several mainstream authors developed new models that ground the use of capital controls. In this context, the main objective of this paper is to analyze the recent evolution of mainstream economics on capital account liberalization and capital controls, focusing on its new evidence and theoretical reorientation. This paper sustains that the new mainstream models represent a new phase in its approach on the regulation of international capital flows.