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Excessive Volatility in Capital Flows: A Pigouvian Taxation Approach

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  • Olivier Jeanne

    () (Peterson Institute for International Economics)

  • Anton Korinek

Abstract

This paper analyzes prudential controls on capital flows to emerging markets from the perspective of a Pigouvian tax that addresses externalities associated with the deleveraging cycle. It presents a model in which restricting capital inflows during boom times reduces the potential outflows during busts. This mitigates the feedback effects of deleveraging episodes, when tightening financial constraints on borrowers and collapsing prices for collateral assets have mutually reinforcing effects. In our model, capital controls reduce macroeconomic volatility and increase standard measures of consumer welfare.

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Bibliographic Info

Paper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP10-5.

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Date of creation: May 2010
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Handle: RePEc:iie:wpaper:wp10-5

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Keywords: capital flows; deleveraging episodes; emerging market economies; Pigouvian tax;

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Cited by:
  1. Benigno, Gianluca & Chen, Huigang & Otrok, Christopher & Rebucci, Alessandro & Young, Eric R., 2013. "Financial crises and macro-prudential policies," Journal of International Economics, Elsevier, vol. 89(2), pages 453-470.
  2. Olivier Jeanne & Anton Korinek, 2010. "Managing Credit Booms and Busts: A Pigouvian Taxation Approach," NBER Working Papers 16377, National Bureau of Economic Research, Inc.
  3. Joseph E. Stiglitz, 2011. "Rethinking Macroeconomics: What Failed, And How To Repair It," Journal of the European Economic Association, European Economic Association, vol. 9(4), pages 591-645, 08.
  4. Arnaud Costinot & Guido Lorenzoni & Iván Werning, 2011. "A Theory of Capital Controls as Dynamic Terms-of-Trade Manipulation," NBER Working Papers 17680, National Bureau of Economic Research, Inc.
  5. Anton Korinek, 2011. "The New Economics of Capital Controls Imposed for Prudential Reasons," IMF Working Papers 11/298, International Monetary Fund.
  6. Charles T. Carlstrom & Timothy S. Fuerst & Matthias Paustian, 2012. "Privately optimal contracts and suboptimal outcomes in a model of agency costs," Working Paper 1204, Federal Reserve Bank of Cleveland.
  7. Charles T Carlstrom & Timothy S Fuerst & Matthias Paustian, 2011. "Indexed debt contracts and the financial accelerator," Working Paper 1117, Federal Reserve Bank of Cleveland.
  8. Raouf Boucekkine & Aude Pommeret & Fabien Prieur, 2012. "On the Timing and Optimality of Capital Controls: Public Expenditures, Debt Dynamics and Welfare," Working Papers 12-15, LAMETA, Universtiy of Montpellier, revised May 2012.
  9. Nguyen, Ha & Qian, Rong, 2012. "The cross-country magnitude and determinants of collateral borrowing," Policy Research Working Paper Series 6001, The World Bank.
  10. Luis Felipe Céspedes & Roberto Chang & Diego Saravia, 2011. "Monetary Policy under Financial Turbulence: An Overview," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.), Monetary Policy under Financial Turbulence, edition 1, volume 16, chapter 1, pages 001-021 Central Bank of Chile.
  11. Jorge Garcia-Arias & Eduardo Fernandez-Huerga & Ana Salvador, . "European periphery crises, international financial markets, and democracy: moving towards a globalized neofeudalism?," Discussion Papers 34, Research on Money and Finance.

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