Working Paper

Stagflation and Topsy-Turvy Capital Flows

Abstract: Are unregulated capital flows excessive during a stagflation episode? We argue that they likely are, owing to a macroeconomic externality operating through the economy’s supply side. Inflows raise domestic wages through a wealth effect on labor supply and cause unwelcome upward pressure on marginal costs in countries where monetary policy is trying to drive down costs to stabilize inflation. Yet, market forces are likely to generate such inflows. Optimal capital flow management instead requires net outflows, suggesting topsy-turvy capital flows following markup shocks.

Keywords: Stabilization policy; Capital flow management; Macroeconomic externalities; Stagflation; Current account adjustment;

JEL Classification: E32; E44; E52; F32; F41; F42;

https://doi.org/10.21034/wp.795

Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Working Papers

Publication Date: 2023-01-26

Number: 795