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Capital Controls with International Reserve Accumulation: Can This Be Optimal?

  • Philippe Bacchetta
  • Kenza Benhima
  • Yannick Kalantzis

Motivated by the Chinese experience, we analyze an economy where the central bank has access to international capital markets, but the private sector does not. The central bank is modeled as a Ramsey planner who can choose the domestic interest rate and the level of international reserves. Consumers are credit-constrained as in Woodford (1990). We find that a rapidly growing economy has a higher welfare without capital mobility. In the Chinese context, we argue that the domestic interest rate should be temporarily above the international rate and that there should be more foreign asset accumulation than in an open economy.

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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 5 (2013)
Issue (Month): 3 (July)
Pages: 229-62

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Handle: RePEc:aea:aejmac:v:5:y:2013:i:3:p:229-62
Note: DOI: 10.1257/mac.5.3.229
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