Capital Control and Short Term Vulnerability

This paper uses Cordella (2003) framework to model an emerging economy and analyzes various situations in the context of capital controls. We conclude that when foreign investors perceive certain country specific risk in an emerging economy, some kind of constraints on capital inflow is desirable. This can help to benefit the investors as well as the country concerned. The example cited in our paper shows that a probable crisis can be avoided with the help of government intervention