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Capital controls and welfare with cross-border bank capital flows

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  • Agénor, Pierre-Richard
  • Jia, Pengfei

Abstract

This performance of time-varying capital controls on cross-border bank borrowing is studied in an open-economy, dynamic stochastic general equilibrium model with financial frictions and imperfect capital mobility. The model is parameterized for a middle-income country and replicates the stylized facts associated with a drop in world interest rates—capital inflows, real appreciation, credit boom, asset price pressures, and output expansion. A capital controls rule, which is fundamentally macroprudential in nature, is defined in terms of changes in bank foreign borrowing. The welfare-maximizing rule is established numerically and compared to the Ramsey policy. The analysis is then extended to solve jointly for optimal countercyclical reserve requirements and capital controls rules. The results show that the implementation of a countercyclical credit-based reserve requirement rule induces less reliance on capital controls. Thus, these two instruments are partial substitutes in maximizing welfare.

Suggested Citation

  • Agénor, Pierre-Richard & Jia, Pengfei, 2020. "Capital controls and welfare with cross-border bank capital flows," Journal of Macroeconomics, Elsevier, vol. 65(C).
  • Handle: RePEc:eee:jmacro:v:65:y:2020:i:c:s0164070420301464
    DOI: 10.1016/j.jmacro.2020.103220
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    2. Johnson, Christopher P., 2021. "International shadow banking and prudential capital controls," Journal of International Money and Finance, Elsevier, vol. 119(C).
    3. Carlos Alberto Zarazúa Juárez, 2021. "Macroprudential regulation as part of the Mexican policy toolkit," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 16(1), pages 1-27, Enero - M.
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    5. Pierre-Richard Agénor & Luiz Awazu Pereira da Silva, 2021. "Macroeconomic policy under a managed float: a simple integrated framework," BIS Working Papers 964, Bank for International Settlements.
    6. Pierre-Richard Agénor & Timothy P. Jackson & Luiz Pereira da Silva, 2020. "Foreign Exchange Intervention and Financial Stability," Working Papers 202027, University of Liverpool, Department of Economics.
    7. Agénor, Pierre-Richard & Flamini, Alessandro, 2022. "Institutional mandates for macroeconomic and financial stability," Journal of Financial Stability, Elsevier, vol. 62(C).
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    More about this item

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • 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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