Working Paper No. 183
By Adrian Penalver
Capital flows to emerging market economies have occurred in cycles, with booms in lending often followed by financial crises. Economic theory, though, has had little to say on the optimal rate at which capital should flow. This paper extends the model of Barro, Mankiw and Sala-i-Martin (1995) to make it more appropriate for analysis of emerging market economies and calculates optimal capital flows based on an estimated Barro-style conditional convergence growth equation. Flows derived from the model are lower than actually observed over the estimation period (1988-97) but the results are sensitive to the parameters chosen.