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Capital controls: a normative analysis

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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 fluctuations. This paper investigates whether countries can benefi t from using such a tool. We develop a welfare based analysis of whether (or, in fact, how)countries should tax international borrowing. Our results suggest that managing exchange rate movements with the use of these taxes can be benefi cial 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 fluctuations. 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 thus point to important gains from international coordination in the use of capital controls.

Suggested Citation

  • Bianca De Paoli & Anna Lipinska, 2012. "Capital controls: a normative analysis," Proceedings, Federal Reserve Bank of San Francisco, issue Nov, pages 1-36.
  • Handle: RePEc:fip:fedfpr:y:2009:p:267-276
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    More about this item

    Keywords

    International Asset Markets; Capital Controls; Welfare;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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