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A Theory of Capital Controls as Dynamic Terms-of-Trade Manipulation

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  • Arnaud Costinot
  • Guido Lorenzoni
  • Iv�n Werning

Abstract

We develop a theory of capital controls as dynamic terms-of-trade manipulation. We study an infinite-horizon endowment economy with two countries. One country chooses taxes on international capital flows in order to maximize the welfare of its representative agent, while the other country is passive. We show that a country growing faster than the rest of the world has incentives to promote domestic savings by taxing capital inflows or subsidizing capital outflows. Although our theory of capital controls emphasizes interest rate manipulation, the pattern of borrowing and lending, per se, is irrelevant.

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File URL: http://www.jstor.org/stable/pdfplus/10.1086/674425
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File URL: http://www.jstor.org/stable/full/10.1086/674425
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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 122 (2014)
Issue (Month): 1 ()
Pages: 77 - 128

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Handle: RePEc:ucp:jpolec:doi:10.1086/674425

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References

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  1. Aoki, Kosuke & Benigno, Gianluca & Kiyotaki, Nobuhiro, 2010. "Adjusting to Capital Account Liberalization," CEPR Discussion Papers 8087, C.E.P.R. Discussion Papers.
  2. Alberto Martin & Filippo Taddei, 2012. "International Capital Flows and Credit Market Imperfections: a Tale of Two Frictions," Working Papers 518, Barcelona Graduate School of Economics.
  3. Nicolas E. Magud E. & Carmen M. & Kenneth S. Rogoff, 2011. "Capital Controls: Myth and Reality--A Portfolio Balance Approach," Working Paper Series WP11-7, Peterson Institute for International Economics.
  4. Arnaud Costinot & Andres Rodriguez-Clare & Costas Arkolakis, 2010. "New Trade Models, Same Old Gains?," 2010 Meeting Papers 433, Society for Economic Dynamics.
  5. Jonathan David Ostry & Atish R. Ghosh & Karl Friedrich Habermeier & Marcos Chamon & Mahvash Saeed Qureshi & Dennis B. S. Reinhardt, 2010. "Capital Inflows," IMF Staff Position Notes 2010/04, International Monetary Fund.
  6. Olivier Jeanne & Anton Korinek, 2010. "Excessive Volatility in Capital Flows: A Pigouvian Taxation Approach," Working Paper Series WP10-5, Peterson Institute for International Economics.
  7. Christian Broda & Nuno Limao & David E. Weinstein, 2008. "Optimal Tariffs and Market Power: The Evidence," American Economic Review, American Economic Association, vol. 98(5), pages 2032-65, December.
  8. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
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Citations

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Cited by:
  1. Gianluca Benigno & Huigang Chen & Christopher Otrok & Alessandro Rebucci & Eric R. Young, 2012. "Capital controls or exchange rate policy? A pecuniary externality perspective," LSE Research Online Documents on Economics 51505, London School of Economics and Political Science, LSE Library.
  2. Gianluca Benigno & Luca Fornaro, 2013. "The Financial Resource Curse," CEP Discussion Papers dp1217, Centre for Economic Performance, LSE.
  3. James P. Gander, 2013. "A Simple Dynamic-Control Macro Model to Examine the Behavior of International Reserves for Selected Economies," Working Paper Series, Department of Economics, University of Utah 2013_11, University of Utah, Department of Economics.
  4. Forbes, Kristin J. & Fratzscher, Marcel & Kostka, Thomas & Straub, Roland, 2012. "Bubble thy neighbor: portfolio effects and externalities from capital controls," Proceedings, Federal Reserve Bank of San Francisco, issue Nov, pages 1-48.
  5. Forbes, Kristin & Fratzscher, Marcel & Straub, Roland, 2014. "Capital Controls and Macroprudential Measures: What Are They Good For?," CEPR Discussion Papers 9798, C.E.P.R. Discussion Papers.
  6. Stephanie Schmitt-Grohe & Martin Uribe, 2012. "Prudential Policy for Peggers," NBER Working Papers 18031, National Bureau of Economic Research, Inc.
  7. Schmitt-Grohé, Stephanie & Uribe, Martín, 2012. "Prudential Policy for Peggers," CEPR Discussion Papers 8961, C.E.P.R. Discussion Papers.
  8. Eden, Maya & Nguyen, Ha, 2012. "Correcting real exchange rate misalignment : conceptual and practical issues," Policy Research Working Paper Series 6045, The World Bank.
  9. 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.
  10. Emmanuel Farhi & Ivan Werning, 2012. "Dealing with the Trilemma: Optimal Capital Controls with Fixed Exchange Rates," NBER Working Papers 18199, National Bureau of Economic Research, Inc.
  11. Zheng Liu & Mark M. Spiegel, 2013. "Monetary policy regimes and capital account restrictions in a small open economy," Working Paper Series 2013-33, Federal Reserve Bank of San Francisco.

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