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Capital controls or macroprudential regulation?

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  • Korinek, Anton
  • Sandri, Damiano

Abstract

International capital flows can create significant financial instability in emerging economies. Does this make it optimal to impose capital controls or should policymakers rely on domestic macroprudential regulation in their quest for greater financial stability? This paper shows that it is desirable to employ both instruments to mitigate contractionary exchange rate depreciations: Macroprudential regulation reduces the amount and riskiness of financial liabilities, no matter whether they are financed by domestic or foreign lenders; capital controls increase the aggregate net worth of the economy by reducing net inflows. Both types of policy measures make the economy more stable and reduce the incidence and severity of crises. They should be set higher the greater an economy's debt burden and the higher domestic inequality. In a calibration based on the East Asian crisis countries, we find that it is optimal to impose both capital controls and macroprudential regulation that amount to a 2% tax on debt flows or equivalent quantity regulations. In advanced countries where the risk of contractionary exchange rate depreciations is more limited, the role for capital controls subsides. However, macroprudential regulation remains essential to mitigate booms and busts in asset prices.

Suggested Citation

  • Korinek, Anton & Sandri, Damiano, 2016. "Capital controls or macroprudential regulation?," Journal of International Economics, Elsevier, vol. 99(S1), pages 27-42.
  • Handle: RePEc:eee:inecon:v:99:y:2016:i:s1:p:s27-s42
    DOI: 10.1016/j.jinteco.2016.02.001
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    Cited by:

    1. Davis, J. Scott & Presno, Ignacio, 2017. "Capital controls and monetary policy autonomy in a small open economy," Journal of Monetary Economics, Elsevier, vol. 85(C), pages 114-130.
    2. Gurnain Pasricha, 2017. "Policy Rules for Capital Controls," Staff Working Papers 17-42, Bank of Canada.
    3. Engel, Charles, 2016. "Macroprudential policy under high capital mobility: policy implications from an academic perspective," Journal of the Japanese and International Economies, Elsevier, vol. 42(C), pages 162-172.
    4. repec:eee:inecon:v:111:y:2018:i:c:p:61-80 is not listed on IDEAS
    5. repec:eee:jeborg:v:142:y:2017:i:c:p:140-163 is not listed on IDEAS
    6. Salih Fendoglu, 2016. "Credit cycles and macroprudential policy framework in emerging countries," BIS Papers chapters,in: Bank for International Settlements (ed.), Macroprudential policy, volume 86, pages 17-25 Bank for International Settlements.
    7. Shigeto Kitano & Kenya Takaku, 2017. "Capital Controls, Macroprudential Regulation,and the Bank Balance Sheet Channel," Discussion Paper Series DP2017-18, Research Institute for Economics & Business Administration, Kobe University, revised Jun 2018.
    8. Everett Grant, 2016. "Exposure to international crises: trade vs. financial contagion," ESRB Working Paper Series 30, European Systemic Risk Board.
    9. Beckmann, Joscha & Czudaj, Robert, 2017. "Capital flows and GDP in emerging economies and the role of global spillovers," Journal of Economic Behavior & Organization, Elsevier, vol. 142(C), pages 140-163.
    10. Valerio Nispi Landi, 2017. "Capital controls, macroprudential measures and monetary policy interactions in an emerging economy," Temi di discussione (Economic working papers) 1154, Bank of Italy, Economic Research and International Relations Area.
    11. Gurnain Kaur Pasricha, 2017. "Policy Rules for Capital Controls," BIS Working Papers 670, Bank for International Settlements.
    12. Kuersteiner, Guido M. & Phillips, David C. & Villamizar-Villegas, Mauricio, 2018. "Effective sterilized foreign exchange intervention? Evidence from a rule-based policy," Journal of International Economics, Elsevier, vol. 113(C), pages 118-138.
    13. Jin Cao & Valeriya Dinger, 2018. "Financial Globalization and Bank Lending: The Limits of Domestic Monetary Policy?," CESifo Working Paper Series 6900, CESifo Group Munich.
    14. Gupta,Poonam - DECOS, 2016. "Capital flows and central banking : the Indian experience," Policy Research Working Paper Series 7569, The World Bank.
    15. Fernando Avalos & Ramon Moreno & Tania Romero, 2015. "Leverage on the buy side," BIS Working Papers 517, Bank for International Settlements.
    16. repec:eee:inecon:v:109:y:2017:i:c:p:43-67 is not listed on IDEAS
    17. Anton Korinek, 2017. "Regulating Capital Flows to Emerging Markets: An Externality View," NBER Working Papers 24152, National Bureau of Economic Research, Inc.
    18. Nadav Ben Zeev, 2017. "Exchange Rate Regimes And Sudden Stops," Working Papers 1712, Ben-Gurion University of the Negev, Department of Economics.
    19. repec:eee:jbfina:v:79:y:2017:i:c:p:110-128 is not listed on IDEAS

    More about this item

    Keywords

    Capital flows; Financial stability; Pecuniary externalities; Capital controls; Macroprudential regulation; Inequality;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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