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On the Desirability of Capital Controls

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  • Jonathan Heathcote
  • Fabrizio Perri

Abstract

In a standard two-country international macro model, the paper asks whether imposing restrictions on international noncontingent borrowing and lending is ever desirable. The answer is yes. If one country imposes capital controls unilaterally, it can generate favorable changes in the dynamics of equilibrium interest rates and the terms of trade, and thereby benefit at the expense of its trading partner. If both countries simultaneously impose capital controls, the welfare effects are ambiguous. The paper identifies calibrations in which symmetric capital controls improve terms-of-trade insurance against country-specific shocks and thereby increase welfare for both countries.

Suggested Citation

  • Jonathan Heathcote & Fabrizio Perri, 2016. "On the Desirability of Capital Controls," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(1), pages 75-102, May.
  • Handle: RePEc:pal:imfecr:v:64:y:2016:i:1:p:75-102
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    More about this item

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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