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Capital Controls and Welfare

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  • Shigeto Kitano

    (Research Institute for Economics and Business Administration (RIEB), Kobe University, Japan)

Abstract

This paper computes welfare levels under different degree of capital controls and compares them with the welfare level under perfect capital mobility by using the methodology of Schmitt-Grohe and Uribe (2007). We show that perfect capital mobility is not always optimal and that capital controls may enhance an economy's welfare level. There exists an optimal degree of capital-account restriction that achieves a higher level of welfare than that under perfect capital mobility, if the economy has costly financial intermediaries. The results of our analysis imply that as the domestic financial intermediaries are less efficient, the government should impose stricter capital controls in the form of a tax on foreign borrowing.

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File URL: http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2010-01.pdf
File Function: Revised version, 2011
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Bibliographic Info

Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number DP2010-01.

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Length: 29 pages
Date of creation: Jan 2010
Date of revision: Jul 2011
Handle: RePEc:kob:dpaper:dp2010-01

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Keywords: Capital controls; Welfare; DSGE; Small open economy;

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References

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  1. Chinn,M.D. & Ito,H., 2005. "What matters for financial development? : capital controls, institutions, and interactions," Working papers 4, Wisconsin Madison - Social Systems.
  2. Schmitt-Grohé, Stephanie & Uribe, Martín, 2004. "Optimal Simple and Implementable Monetary and Fiscal Rules," CEPR Discussion Papers 4334, C.E.P.R. Discussion Papers.
  3. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Solving dynamic general equilibrium models using a second-order approximation to the policy function," Journal of Economic Dynamics and Control, Elsevier, vol. 28(4), pages 755-775, January.
  4. Jaime Guajardo, 2008. "Financial Frictions and Business Cycles in Middle-Income Countries," IMF Working Papers 08/20, International Monetary Fund.
  5. Barry Eichengreen & Hans-Joachim Voth, 2003. "Symposium on capital controls," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(3), pages 185-187.
  6. Eswar S. Prasad & Raghuram Rajan, 2008. "A Pragmatic Approach to Capital Account Liberalization," NBER Working Papers 14051, National Bureau of Economic Research, Inc.
  7. Kose, M. Ayhan & Prasad, Eswar S. & Taylor, Ashley D., 2009. "Thresholds in the process of international financial integration," Policy Research Working Paper Series 5149, The World Bank.
  8. M. Ayhan Kose & Eswar Prasad & Kenneth S. Rogoff & Shang-Jin Wei, 2006. "Financial Globalization: A Reappraisal," NBER Working Papers 12484, National Bureau of Economic Research, Inc.
  9. Daekuen Park & Jeffrey Sachs, 1987. "Capital Controls and the Timing of Exchange Regime Collapse," NBER Working Papers 2250, National Bureau of Economic Research, Inc.
  10. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2004. "FDI and economic growth: the role of local financial markets," Journal of International Economics, Elsevier, vol. 64(1), pages 89-112, October.
  11. Akira Ariyoshi & Andrei Kirilenko & Inci Ötker & Bernard Laurens & Jorge Iván Canales Kriljenko & Karl Friedrich Habermeier, 2000. "Capital Controls," IMF Occasional Papers 190, International Monetary Fund.
  12. Edwards, Sebastian & Vegh, Carlos A., 1997. "Banks and macroeconomic disturbances under predetermined exchange rates," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 239-278, October.
  13. Yashiv, Eran, 1998. "Capital controls policy an intertemporal perspective," Journal of Economic Dynamics and Control, Elsevier, vol. 22(2), pages 219-245, February.
  14. Kristin J. Forbes, 2005. "The Microeconomic Evidence on Capital Controls: No Free Lunch," NBER Working Papers 11372, National Bureau of Economic Research, Inc.
  15. Wyplosz, Charles, 1986. "Capital controls and balance of payments crises," Journal of International Money and Finance, Elsevier, vol. 5(2), pages 167-179, June.
  16. Michael W. Klein & Giovanni Olivei, 1999. "Capital Account Liberalization, Financial Depth and Economic Growth," NBER Working Papers 7384, National Bureau of Economic Research, Inc.
  17. Dellas, Harris & Stockman, Alan, 1993. "Self-Fulfilling Expectations, Speculative Attack, and Capital Controls," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(4), pages 721-30, November.
  18. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
  19. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Closing Small Open Economy Models," Departmental Working Papers 200115, Rutgers University, Department of Economics.
  20. M. Ayhan Kose & Kenneth Rogoff & Eswar Prasad & Shang-Jin Wei, 2003. "Effects of Financial Globalization on Developing Countries," IMF Occasional Papers 220, International Monetary Fund.
  21. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1994. "The Capital Inflows Problem: Concepts And Issues," Contemporary Economic Policy, Western Economic Association International, vol. 12(3), pages 54-66, 07.
  22. Martin Uribe, 2006. "On Overborrowing," NBER Working Papers 11913, National Bureau of Economic Research, Inc.
  23. Francisco A. Gallego & Leonardo Hernandez & Klaus Schmidt-Hebbel, 2000. "Capital Controls in Chile: Effective? Efficient?," Econometric Society World Congress 2000 Contributed Papers 0330, Econometric Society.
  24. Uribe, Martin & Yue, Vivian Z., 2006. "Country spreads and emerging countries: Who drives whom?," Journal of International Economics, Elsevier, vol. 69(1), pages 6-36, June.
  25. Michael P. Dooley, 1996. "A Survey of Literature on Controls over International Capital Transactions," IMF Staff Papers, Palgrave Macmillan, vol. 43(4), pages 639-687, December.
  26. Bacchetta, Philippe, 1990. "Temporary capital controls in a balance-of- payments crisis," Journal of International Money and Finance, Elsevier, vol. 9(3), pages 246-257, September.
  27. Auernheimer, Leonardo, 1987. "On the outcome of inconsistent programs under exchange rate and monetary rules : Allowing the market to compensate for government mistakes," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 279-305, March.
  28. Shigeto Kitano, 2007. "Capital Controls, Public Debt and Currency Crises," Journal of Economics, Springer, vol. 90(2), pages 117-142, March.
  29. Stephanie Schmitt-Grohé & Martín Uribe, 2006. "Optimal Simple and Implementable Monetary and Fiscal Rules: Expanded Version," NBER Working Papers 12402, National Bureau of Economic Research, Inc.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Capital controls and welfare
    by Christian Zimmermann in NEP-DGE blog on 2010-02-01 22:05:30

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