Advanced Search
MyIDEAS: Login to save this paper or follow this series

Dealing with the Trilemma: Optimal Capital Controls with Fixed Exchange Rates

Contents:

Author Info

  • Emmanuel Farhi
  • Ivan Werning

Abstract

We lay down a standard macroeconomic model of a small open economy with a fixed exchange rate and study optimal capital controls (defined as maximizing the utility of a representative household). We provide sharp analytical and numerical characterizations for a variety of shocks. We find that capital controls are employed to respond to some shocks but not others. They are particularly effective to address risk-premium shocks that affect the interest rate differential foreign investors require in a particular country. We also discuss how the solution depends on the degree of nominal rigidity and the openness of the economy. We show that capital controls may be optimal even if the exchange rate is not fixed in response to risk premium shocks or if wages, in addition to prices, are sticky. Finally, we compare the single country’s optimum to a coordinated world solution. Our results show a limited need for coordination. However, the uncoordinated solution features the same capital controls as the coordinated solution.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w18199.pdf
Download Restriction: Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18199.

as in new window
Length:
Date of creation: Jun 2012
Date of revision:
Handle: RePEc:nbr:nberwo:18199

Note: EFG IFM ME
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Maurice Obstfeld & Kenneth Rogoff, 1994. "Exchange Rate Dynamics Redux," NBER Working Papers 4693, National Bureau of Economic Research, Inc.
  2. Martin, Alberto & Taddei, Filippo, 2013. "International capital flows and credit market imperfections: A tale of two frictions," Journal of International Economics, Elsevier, Elsevier, vol. 89(2), pages 441-452.
  3. Pablo A. Neumeyer & Fabrizio Perri, 2001. "Business Cycles in Emerging Economies:The Role of Interest Rates," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 01-12, New York University, Leonard N. Stern School of Business, Department of Economics.
  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. Clarida, Richard & Galí, Jordi & Gertler, Mark, 2002. "A Simple Framework for International Monetary Policy Analysis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3355, C.E.P.R. Discussion Papers.
  6. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2001. "International and domestic collateral constraints in a model of emerging market crises," Journal of Monetary Economics, Elsevier, Elsevier, vol. 48(3), pages 513-548, December.
  7. Guillermo A. Calvo, 1998. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 35-54, November.
  8. 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.
  9. Stanley W. Black, 1972. "International money markets and flexible exchange rates," Staff Studies, Board of Governors of the Federal Reserve System (U.S.) 70, Board of Governors of the Federal Reserve System (U.S.).
  10. Jonathan David Ostry & Atish R. Ghosh & Karl Friedrich Habermeier & Marcos Chamon & Mahvash Saeed Qureshi & Dennis B. S. Reinhardt, 2010. "Capital Inflows," IMF Staff Position Notes 2010/04, International Monetary Fund.
  11. Jordi Gal� & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Yan Carriere-Swallow & Pablo Garcia-Silva, 2013. "Capital Account Policies in Chile Macro-financial considerations along the path to liberalization," IMF Working Papers 13/107, International Monetary Fund.
  2. Michael W. Klein & Jay C. Shambaugh, 2013. "Rounding the Corners of the Policy Trilemma: Sources of Monetary Policy Autonomy," IMES Discussion Paper Series 13-E-14, Institute for Monetary and Economic Studies, Bank of Japan.
  3. D. Filiz Unsal, 2013. "Capital Flows and Financial Stability: Monetary Policy and Macroprudential Responses," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 233-285, March.
  4. Olivier Jeanne, 2014. "Macroprudential Policies in a Global Perspective," IMES Discussion Paper Series 14-E-01, Institute for Monetary and Economic Studies, Bank of Japan.
  5. Kai Liu, 2014. "Dollar Hegemony and China’s Economy," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 1410, Faculty of Economics, University of Cambridge.
  6. Javier Bianchi & Enrique G. Mendoza, 2013. "Optimal Time-Consistent Macroprudential Policy," NBER Working Papers 19704, National Bureau of Economic Research, Inc.
  7. Anton Korinek & Alp Simsek, 2014. "Liquidity Trap and Excessive Leverage," NBER Working Papers 19970, National Bureau of Economic Research, Inc.
  8. Agnès Bénassy-Quéré & Benjamin Carton & Ludovic Gauvin, 2011. "Rebalancing Growth in China: An International Perspective," Working Papers 2011-08, CEPII research center.
  9. Chun Chang & Zheng Liu & Mark M. Spiegel, 2013. "Capital controls and optimal Chinese monetary policy," Working Paper Series, Federal Reserve Bank of San Francisco 2012-13, Federal Reserve Bank of San Francisco.
  10. Kris James Mitchener & Kirsten Wandschneider, 2014. "Capital Controls and Recovery from the Financial Crisis of the 1930s," NBER Working Papers 20220, National Bureau of Economic Research, Inc.
  11. Javier Bianchi, 2012. "Comment on "Capital Account Policies and the Real Exchange Rate"," NBER Chapters, in: NBER International Seminar on Macroeconomics 2012, pages 43-48 National Bureau of Economic Research, Inc.
  12. Andrés Fernández & Alessandro Rebucci & Martín Uribe, 2013. "Are Capital Controls Prudential? An Empirical Investigation," NBER Working Papers 19671, National Bureau of Economic Research, Inc.
  13. Zheng Liu & Mark M. Spiegel, 2013. "Monetary policy regimes and capital account restrictions in a small open economy," Working Paper Series, Federal Reserve Bank of San Francisco 2013-33, Federal Reserve Bank of San Francisco.
  14. Michael B. Devereux & James Yetman, 2013. "Capital Controls, Global Liquidity Traps and the International Policy Trilemma," NBER Working Papers 19091, National Bureau of Economic Research, Inc.
  15. 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.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:18199. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.