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Capital Controls: a Normative Analysis

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  • Anna Lipinska

    (Federal Reserve Board)

  • Bianca De Paoli

    (Federal Reserve Bank of New York)

Abstract

Countries' concerns with the value of their currency have been extensively studied and documented in the literature. Capital controls can be (and often are) used as a tool to manage exchange rate áuctuations. This paper investigates whether countries can benefit from using such tool. We develop a welfare based analysis of whether (or, in fact, how) countries should tax international borrowing. Our results suggest that restricting international capital flows with the use of these taxes can be beneficial for individual countries although it would limit cross-border pooling of risk. This is because while consumption risk-pooling is important, individual countries also care about domestic output áuctuations. Moreover, the results show that countries decide to restrict the international flow of capital exactly when this flow is crucial to ensure cross-border risk-sharing. Our findings point to the possibility of costly "capital control wars" and, thus, significant gains from international policy coordination.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 861.

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Date of creation: 2013
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Handle: RePEc:red:sed013:861

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  1. Sebastian Edwards, 2007. "Introduction to "Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences"," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 1-18 National Bureau of Economic Research, Inc.
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  3. Backus, David K. & Smith, Gregor W., 1993. "Consumption and real exchange rates in dynamic economies with non-traded goods," Journal of International Economics, Elsevier, vol. 35(3-4), pages 297-316, November.
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  7. Kollmann, Robert, 1995. "Consumption, real exchange rates and the structure of international asset markets," Journal of International Money and Finance, Elsevier, vol. 14(2), pages 191-211, April.
  8. Tille, Cedric, 2001. "The role of consumption substitutability in the international transmission of monetary shocks," Journal of International Economics, Elsevier, vol. 53(2), pages 421-444, April.
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  16. Anton Korinek, 2011. "The New Economics of Prudential Capital Controls: A Research Agenda," IMF Economic Review, Palgrave Macmillan, vol. 59(3), pages 523-561, August.
  17. Martin D D Evans & Viktoria Hnatkovska, 2006. "International Capital Flows Returns and World Financial Integration," 2006 Meeting Papers 60, Society for Economic Dynamics.
  18. Javier Bianchi, 2010. "Overborrowing and Systemic Externalities in the Business Cycle," 2010 Meeting Papers 96, Society for Economic Dynamics.
  19. Stephanie Schmitt-Grohe & Martin Uribe, 2012. "Managing Currency Pegs," American Economic Review, American Economic Association, vol. 102(3), pages 192-97, May.
  20. Michael B. Devereux & Alan Sutherland, 2008. "Country portfolios in open economy macro models," Globalization and Monetary Policy Institute Working Paper 09, Federal Reserve Bank of Dallas.
  21. Enrique Mendoza & Javier Bianchi, 2010. "Overborrowing, financial crises and ‘macro-prudential’ taxes," Proceedings, Federal Reserve Bank of San Francisco, issue Oct.
  22. Sebastian Edwards, 2007. "Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences," NBER Books, National Bureau of Economic Research, Inc, number edwa06-1, October.
  23. Günter Coenen & Giovanni Lombardo & Frank Smets & Roland Straub, 2007. "International Transmission and Monetary Policy Cooperation," NBER Chapters, in: International Dimensions of Monetary Policy, pages 157-192 National Bureau of Economic Research, Inc.
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  25. Schmitt-Grohé, Stephanie & Uribe, Martín, 2012. "Managing Currency Pegs," CEPR Discussion Papers 8983, C.E.P.R. Discussion Papers.
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Cited by:
  1. Gianluca Benigno & Luca Fornaro, 2013. "The Financial Resource Curse," CEP Discussion Papers dp1217, Centre for Economic Performance, LSE.
  2. Gianluca Benigno & Huigang Chen & Christopher Otrok & Alessandro Rebucci & Eric R. Young, 2012. "Capital Controls or Exchange Rate Policy? A Pecuniary Externality Perspective," CEP Discussion Papers dp1160, Centre for Economic Performance, LSE.
  3. Davis, Scott & Presno, Ignacio, 2014. "Capital controls as an instrument of monetary policy," Globalization and Monetary Policy Institute Working Paper 171, Federal Reserve Bank of Dallas.
  4. Gianluca Benigno & Huigang Chen & Christopher Otrok & Alessandro Rebucci & Eric Young, 2013. "Capital Controls or Real Exchange Rate Policy? A Pecuniary Externality Perspective," Research Department Publications IDB-WP-393, Inter-American Development Bank, Research Department.

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