Objectives of the Chapter

Internationalcapital flows are sometimes courted, sometimes denigrated, and sometimestroublesome for the governments of the countries involved. This chapter focuseson portfolio lending, which is the transfer of financial assets (rather thanforeign direct investment) between countries. After a welfare analysis of well‑behavedinternational lending, an overview is offered of the post‑WWII patterns ofcapital flows and financial crises.

What we find in this chapter is that international lending can be verygood when it goes well, and very bad when it goes awry.  In both the 1980s and the 1990s, massiveamounts of capital flowed from industrialized countries to “emerging markets.”  During each of these decades, however,financial crises arose as some borrower countries found it difficult to servicetheir external debt.  The recurrentnature of these crises, and their tendency to spread to other countries, hashighlighted the role that has been (and should be) played by internationalfinancial agencies such as the IMF.

After studyingChapter 21 you should be able to     

     1.    analyze thevarious types of international capital flows.

     2.    illustrate andexplain the welfare effects of allowing free international lending andborrowing.

     3.    evaluate the casefor taxing international capital flows.

     4.    evaluate the roleof defective property rights in recurrent sovereign debt crises.

     5.    outline thecauses and resolutions of financial crises.

     6.    evaluate proposalsto prevent future financial crises, particularly capital controls and bankingreform.