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Capital Controls or Real Exchange Rate Policy?: A Pecuniary Externality Perspective

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  • Gianluca Benigno
  • Huigang Chen
  • Christopher Otrok
  • Alessandro Rebucci
  • Eric R. Young

Abstract

In the aftermath of the global financial crisis, a new policy paradigm has emerged in which old-fashioned policies such as capital controls and other government distortions have become part of the standard policy tool kit (so called macro- prudential policies). On the wave of this seemingly unanimous policy consensus, a new strand of theoretical literature contends that capital controls are welfare enhancing and can be justified rigorously because of second-best considerations. Within the same theoretical framework adopted in this fast-growing literature, this paper shows that a credible commitment to support the exchange rate in crisis times always welfare-dominates prudential capital controls, as it can achieve unconstrained allocation.

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Bibliographic Info

Paper provided by Inter-American Development Bank in its series IDB Publications with number 80682.

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Date of creation: Mar 2013
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Handle: RePEc:idb:brikps:80682

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Keywords: Financial Sector; IDB-WP-393;

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References

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  1. Anna Lipinska & Bianca De Paoli, 2013. "Capital Controls: a Normative Analysis," 2013 Meeting Papers, Society for Economic Dynamics 861, Society for Economic Dynamics.
  2. Bruce Ian Carlin & Shaun William Davies & Andrew Miles Iannaccone, 2010. "Competing for Attention in Financial Markets," NBER Working Papers, National Bureau of Economic Research, Inc 16085, National Bureau of Economic Research, Inc.
  3. Bianchi, Javier, 2009. "Overborrowing and Systemic Externalities in the Business Cycle," MPRA Paper, University Library of Munich, Germany 16270, University Library of Munich, Germany.
  4. Braggion, F. & Christiano, L. & Roldos, J., 2007. "Optimal Monetary Policy in a Sudden Stop," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-3107633, Tilburg University.
  5. Timothy J Kehoe & David K Levine, 1993. "Debt Constrained Asset Markets," Levine's Working Paper Archive, David K. Levine 1276, David K. Levine.
  6. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer, Springer, vol. 6(4), pages 459-472, November.
  7. Anton Korinek, 2011. "The New Economics of Prudential Capital Controls: A Research Agenda," IMF Economic Review, Palgrave Macmillan, Palgrave Macmillan, vol. 59(3), pages 523-561, August.
  8. Nicolas E. Magud E. & Carmen M. & Kenneth S. Rogoff, 2011. "Capital Controls: Myth and Reality--A Portfolio Balance Approach," Working Paper Series, Peterson Institute for International Economics WP11-7, Peterson Institute for International Economics.
  9. Benigno, Gianluca & Fornaro, Luca, 2013. "The Financial Resource Curse," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9489, C.E.P.R. Discussion Papers.
  10. Enrique Mendoza & Javier Bianchi, 2010. "Overborrowing, financial crises and ‘macro-prudential’ taxes," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Oct.
  11. Ricardo J Caballero, 2010. "Sudden Financial Arrest," IMF Economic Review, Palgrave Macmillan, Palgrave Macmillan, vol. 58(1), pages 6-36, August.
  12. Jonathan David Ostry & Atish R. Ghosh & Anton Korinek, 2012. "Multilateral Aspects of Managing the Capital Account," IMF Staff Discussion Notes, International Monetary Fund 12/10, International Monetary Fund.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Exchange rate commitment always beats capital controls
    by Economic Logician in Economic Logic on 2014-01-24 15:08:00
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Cited by:
  1. Timothy J. Kehoe & Kim J. Ruhl & Joseph B. Steinberg, 2013. "What will happen when foreigners stop lending to the United States?," Economic Policy Paper, Federal Reserve Bank of Minneapolis 13-4, Federal Reserve Bank of Minneapolis.
  2. Davis, Scott & Presno, Ignacio, 2014. "Capital controls as an instrument of monetary policy," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 171, Federal Reserve Bank of Dallas.

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