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Keynes Fund


Summary of Project Plan

A large literature on the International Monetary System (IMS) highlights stark asymmetries across countries, particularly between center countries who issue reserve assets and are the subject of capital inflows and periphery countries, resulting in large and volatile capital flows, see Rey (2015), Maggiori (2017) and Caballero, Farhi, and Gourinchas (2017) amongst many others. Contemporary political discourse places these asymmetries into sharp focus. In this project I highlight that capital (in)flows to center countries have adverse effects, particularly when domestic frictions are taken into account, and I discuss the desirability of macroprudential policies such as capital controls.

The project’s contribution is threefold. Firstly, I show both empirically and in a standard model that sudden surges in capital flows have implications on the terms of trade (the price of exports in terms of imports) leaving scope for the use of capital controls, in line with a large classical literature on terms of trade externalities originating from the transfer problem debate between Keynes (1929) and Ohlin (1929). Second, I enrich the model to show that in the presence of domestic frictions which I document, in particular limited financial market participation and nominal rigidities, sudden surges in capital inflows result in the endogenous emergence of winners and losers domestically. Consequently, a large open economy (the hegemon) that occupies a central position in the IMS, such as the U.S., must address a domestic policy dilemma in the face of large (inefficient) capital inflows. Third, I propose an alternative model for inter- national financial financial markets which provides a liquidity-based explanation for the surge of capital flows from periphery to center countries during periods of global financial turmoil.

As we focus on optimal information collection by the governments to persuade citizens, with the goal of avoiding coordination failures, we believe that our work fits the Keynes Fund’s objectives very well. We seek to better understand how market failures can be avoided, with the goal of improving public policy. Moreover, our questions pertain to important questions about financial markets, and how the “animal spirits” that govern them can be reined in.



Emile Marin


Emile Marin is a PhD student at the Faculty of Economics, University of Cambridge. His research interests are International Economics, Financial Economics and Optimal Policy.


Cambridge Working Papers in Economics (CWPE)



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