OECD Development Centre Working Papers

The OECD Development Centre links OECD members with developing and emerging economies and fosters debate and discussion to seek creative policy solutions to emerging global issues and development challenges. This series of working papers is intended to disseminate the OECD Development Centre’s research findings rapidly among specialists in the field concerned. These papers are generally available in the original English or French, with a summary in the other language.

English, French

Long-Term Capital Reflow Under Macroeconomic Stabilization in Latin America

This paper focuses on the scope for stabilizing Latin American economies to repatriate capital for the financing of long-term investments and economic recovery in the region. In particular, a simple two-period investment model is developed to show that a government seeking capital repatriation may be tempted to introduce investment subsidies on such long-term capital inflows. Typically, however, such a government will be facing the following trade off: small investment subsidies may not be sufficient to attract large-scale repatriation, and high aggregate subsidies may trigger inflationary expectations. A decreasing subsidy scheme is shown to be optimal. Such a scheme has the following properties: it provides an incentive for investors to repatriate their capital early, and at the same time, it keeps government spending low enough not to jeopardize stabilization programmes. A decreasing subsidy scheme could account for the success that the Chilean debt-equity-swap programmes have ...


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