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Capital controls: a normative analysis

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  • De Paoli, Bianca
  • Lipinska, Anna

    (Federal Reserve Bank of San Francisco)

Abstract

Countries' ’concerns with the value of their currency have been extensively studied and documented in the literature. Capital controls can be (and often are) used as a tool to manage exchange rate fl‡uctuations. This paper investigates whether countries can benefi t from using such a tool. We develop a welfare based analysis of whether (or, in fact, how)countries should tax international borrowing. Our results suggest that managing exchange rate movements with the use of these taxes can be benefi cial for individual countries although it would limit cross-border pooling of risk. This is because while consumption risk-pooling is important, individual countries also care about domestic output fl‡uctuations. Moreover, the results show that countries decide to restrict the international ‡flow of capital exactly when this fl‡ow is crucial to ensure cross-border risk-sharing. Our findings thus point to important gains from international coordination in the use of capital controls.

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Bibliographic Info

Article provided by Federal Reserve Bank of San Francisco in its journal Proceedings.

Volume (Year): (2012)
Issue (Month): Nov ()
Pages: 1-36

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Handle: RePEc:fip:fedfpr:y:2009:p:267-276

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Keywords: Capital Controls; Welfare; International Asset Markets;

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References

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Citations

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Cited by:
  1. Gianluca Benigno & Luca Fornaro, 2013. "The Financial Resource Curse," CEP Discussion Papers dp1217, Centre for Economic Performance, LSE.
  2. Gianluca Benigno & Huigang Chen & Christopher Otrok & Alessandro Rebucci & Eric R. Young, 2012. "Capital controls or exchange rate policy? a pecuniary externality perspective," Working Papers 2012-025, Federal Reserve Bank of St. Louis.
  3. Gianluca Benigno & Huigang Chen & Christopher Otrok & Alessandro Rebucci & Eric R. Young, 2013. "Capital Controls or Real Exchange Rate Policy?: A Pecuniary Externality Perspective," IDB Publications 80682, Inter-American Development Bank.
  4. Davis, Scott & Presno, Ignacio, 2014. "Capital controls as an instrument of monetary policy," Globalization and Monetary Policy Institute Working Paper 171, Federal Reserve Bank of Dallas.

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