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Capital Controls as a Credit Policy Tool in a Small Open Economy

Author

Listed:
  • Shigeto Kitano

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

  • Kenya Takaku

    (Faculty of International Studies, Hiroshima City University, Japan)

Abstract

We incorporate a banking sector with balance sheet frictions into a model of a small open economy and compare the effectiveness of capital controls and that of macroprudential regulation. We show that the welfare-improving effect of capital controls is larger than that of macroprudential regulation if the degree of financial friction between domestic banks and foreign investors is high, whereas the welfare-improving effect of macroprudential regulation is larger than that of capital controls if the degree of financial friction is low. Comparing two economies, one with and one without "liability dollarization," we also find that the welfare-improving effect of capital controls is larger than that of macroprudential regulation in the presence of "liability dollarization."

Suggested Citation

  • Shigeto Kitano & Kenya Takaku, 2016. "Capital Controls as a Credit Policy Tool in a Small Open Economy," Discussion Paper Series DP2016-11, Research Institute for Economics & Business Administration, Kobe University, revised Jul 2017.
    • Handle: RePEc:kob:dpaper:dp2016-11
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    File URL: https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2016-11.pdf
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    References listed on IDEAS

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    Cited by:

    1. Kitano, Shigeto & Takaku, Kenya, 2020. "Capital controls, macroprudential regulation, and the bank balance sheet channel," Journal of Macroeconomics, Elsevier, vol. 63(C).
    2. Villca, Alfredo, 2022. "Commodity prices, bank balance sheets and macroprudential policies in small open economies," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 3(1).

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    More about this item

    Keywords

    Capital control; Credit policy; Balance sheets; Small open economy; Nominal rigidities; New Keynesian; DSGE; Financial intermediaries; Financial frictions; Crisis;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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