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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. 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.
  2. Michael Klein & Giovanni Olivei, 1999. "Capital account liberalization, financial depth, and economic growth," Working Papers 99-6, Federal Reserve Bank of Boston.
  3. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Closing Small Open Economy Models," NBER Working Papers 9270, National Bureau of Economic Research, Inc.
  4. Martín Uribe, 2006. "On Overborrowing," American Economic Review, American Economic Association, vol. 96(2), pages 417-421, May.
  5. Kristin J. Forbes, 2005. "The Microeconomic Evidence on Capital Controls: No Free Lunch," NBER Working Papers 11372, National Bureau of Economic Research, Inc.
  6. 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.
  7. Eswar S. Prasad & Raghuram G. Rajan, 2008. "A Pragmatic Approach to Capital Account Liberalization," Journal of Economic Perspectives, American Economic Association, vol. 22(3), pages 149-72, Summer.
  8. Francisco Gallego & Leonardo Hernández & Klaus Schmidt-Hebbel, 1999. "Capital Controls in Chile: Effective? Efficient?," Working Papers Central Bank of Chile 59, Central Bank of Chile.
  9. Dellas, H. & Stockman, A.C., 1988. "Self-Fullfilling Expectations, Speculative Attacks And Capital Controls," RCER Working Papers 138, University of Rochester - Center for Economic Research (RCER).
  10. Martin Uribe & Vivian Z. Yue, 2003. "Country Spreads and Emerging Countries: Who Drives Whom?," NBER Working Papers 10018, National Bureau of Economic Research, Inc.
  11. Daekuen Park & Jeffrey Sachs, 1987. "Capital Controls and the Timing of Exchange Regime Collapse," NBER Working Papers 2250, National Bureau of Economic Research, Inc.
  12. 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.
  13. 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.
  14. Chinn, Menzie David & Ito, Hiro, 2005. "What Matters for Financial Development? Capital Controls, Institutions, and Interactions," Santa Cruz Center for International Economics, Working Paper Series qt5pv1j341, Center for International Economics, UC Santa Cruz.
  15. Sebastian Edwards & Carlos A. Vegh, 1997. "Banks and Macroeconomics Disturbances under Predetermined Exchange Rates," NBER Working Papers 5977, National Bureau of Economic Research, Inc.
  16. 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.
  17. 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.
  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. 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.
  20. Jaime Guajardo, 2008. "Financial Frictions and Business Cycles in Middle-Income Countries," IMF Working Papers 08/20, International Monetary Fund.
  21. M. Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(2), pages 143-197, June.
  22. 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.
  23. Stephanie Schmitt-Grohe & Martin Uribe, 2004. "Optimal Simple and Implementable Monetary and Fiscal Rules," NBER Working Papers 10253, National Bureau of Economic Research, Inc.
  24. Shigeto Kitano, 2007. "Capital Controls, Public Debt and Currency Crises," Journal of Economics, Springer, vol. 90(2), pages 117-142, March.
  25. 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.
  26. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1994. "The capital inflows problem: Concepts and issues," MPRA Paper 13902, University Library of Munich, Germany.
  27. Wyplosz, Charles, 1986. "Capital controls and balance of payments crises," Journal of International Money and Finance, Elsevier, vol. 5(2), pages 167-179, June.
  28. Yashiv, Eran, 1998. "Capital controls policy an intertemporal perspective," Journal of Economic Dynamics and Control, Elsevier, vol. 22(2), pages 219-245, February.
  29. 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.
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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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