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Capital Controls and the Gains from Trade in a Business Cycle Model of a Small Open Economy

Author

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  • Enrique G. Mendoza

    (International Monetary Fund)

Abstract

A dynamic stochastic model of a small open economy is used to quantify the macroeconomic effects of a policy that utilizes capital controls as an instrument to target the trade balance. The results show that, given the magnitude of actual business cycles, capital controls have negligible effects on agents' ability to smooth consumption and the level of welfare. These surprising results suggest that the benefits obtained from free trade as a mechanism that facilitates consumption smoothing are of secondary importance. A fiscal strategy that enforces capital controls by taxing foreign interest income is also studied.

Suggested Citation

  • Enrique G. Mendoza, 1991. "Capital Controls and the Gains from Trade in a Business Cycle Model of a Small Open Economy," IMF Staff Papers, Palgrave Macmillan, vol. 38(3), pages 480-505, September.
    • Handle: RePEc:pal:imfstp:v:38:y:1991:i:3:p:480-505
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-

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