Capital Controls and International Development: A Theoretical Reconsideration

Abstract This survey article develops a stochastic framework to analyze capital inflows and outflows and to illustrate how a developing economy can determine its level of capital account openness and simultaneously balance concerns regarding economic growth and volatility. We find that rapid economic growth inevitably causes fluctuations in a financially immature economy that has a high level of capital account openness. We identify a conflict of interest between capital‐rich and capital‐importing economies when capital account liberalization is promoted by the former.