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Capital controls: a normative analysis

  • De Paoli, Bianca
  • Lipinska, Anna

    (Federal Reserve Bank of San Francisco)

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.

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File URL: http://www.frbsf.org/economic-research/events/2012/november/pacific-basin-research-conference-2012-cpbs/DePaoliLipinska.pdf
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Article provided by Federal Reserve Bank of San Francisco in its journal Proceedings.

Volume (Year): (2012)
Issue (Month): Nov ()
Pages: 1-36

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Handle: RePEc:fip:fedfpr:y:2009:p:267-276
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  2. Gianluca Benigno & Huigang Chen & Christopher Otrok & Alessandro Rebucci & Eric R. Young, 2011. "Financial Crises and Macro-Prudential Policies," IDB Publications (Working Papers) 27738, Inter-American Development Bank.
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  7. Javier Bianchi, 2009. "Overborrowing and systemic externalities in the business cycle," FRB Atlanta Working Paper 2009-24, Federal Reserve Bank of Atlanta.
  8. Benigno, Gianluca & Benigno, Pierpaolo, 2006. "Designing targeting rules for international monetary policy cooperation," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 473-506, April.
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  12. 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.
  13. David K. Backus & Gregor W. Smith, 1993. "Consumption and Real Exchange Rates in Dynamic Economies with Non-Traded Goods," Working Papers 1252, Queen's University, Department of Economics.
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  15. Bianca De Paoli, 2004. "Monetary policy and welfare in a small open economy," LSE Research Online Documents on Economics 19950, London School of Economics and Political Science, LSE Library.
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  17. Schmitt-Grohé, Stephanie & Uribe, Martín, 2012. "Managing Currency Pegs," CEPR Discussion Papers 8983, C.E.P.R. Discussion Papers.
  18. Jinill Kim & Sunghyun Henry Kim, 1999. "Spurious Welfare Reversals in International Business Cycle Models," Virginia Economics Online Papers 319, University of Virginia, Department of Economics.
  19. Stephanie Schmitt-Grohe & Martin Uribe, 2012. "Managing Currency Pegs," American Economic Review, American Economic Association, vol. 102(3), pages 192-97, May.
  20. Enrique G. Mendoza & Javier Bianchi, 2010. "Overborrowing, financial crises and ‘macro-prudential’ taxes," Proceedings, Federal Reserve Bank of San Francisco, issue Oct.
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  23. 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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