The Effects Of Restricting Capital Outflows On Investment In An Open Economy

Abstract

This paper considers the effects of restricting capital outflows on foreign investment in a developing country. It is shown that a developing country may restrict capital outflows if domestic economic conditions are poor, and it may liberalize capital outflows if domestic economic conditions are strong. Restricting capital outflows has large impact if the investment horizon is short. Furthermore, restricting capital outflows may discourage foreign investors from investing in the developing country. This result is consistent with the home equity bias.