Capital flow volatility and drivers of capital flows have extensively motivated economic research. This is because large swings in capital flows can cause excessive disruption to the business cycle.
Policy debates have been inconclusive on how EMFEs should transition to being more financially open. In the discussion, literature is leaning towards capital inflow controls. Other respected authors in the field report that control on capital outflows as ineffective.
This study contributes to the theory on financial openness, imperfect financial markets, exchange rate determination and external adjustments by: calibrating a model with risk-taking financiers and a bank funding technology that captures financial openness; and analysing the relative importance of channels of external adjustment in economies and transmission of shocks to the real economy.
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