Temporary stabilization with capital controls
This paper studies both positive and normative aspects of quantity-based capital controls in a small open economy undergoing a temporary inflation stabilization plan. In the model, capital controls are implemented by choosing two policy variables: a ceiling on the private sector debt and a terminal date for removing controls; the date on which controls trigger and hence its duration are endogenously determined. Equilibrium dynamics are characterized for all feasible range of debt ceilings and durations. Temporary controls that end with the collapse of the stabilization plan are shown to mitigate consumption boom-bust cycles and dominate allocations under perfect capital mobility, thus providing a "second-best" rationale for employing them. For controls that are prolonged beyond the collapse of the stabilization plan, equilibria exist even when the debt ceiling is above the debt that accumulates under perfect capital mobility. Here, if the ceiling is sufficiently low, controls mitigate consumption cycles. Conversely, a sufficiently high ceiling amplifies consumption cycles. For prolonged controls, there is a critical value of debt ceiling below (above) which the welfare is higher (lower) relative to the perfect capital mobility case. Finally, for a given debt ceiling, prolonged controls rank lower in welfare than those that end with the stabilization plan.
(This abstract was borrowed from another version of this item.)
Volume (Year): 34 (2008)
Issue (Month): 3 (March)
|Contact details of provider:|| Web page: http://www.springer.com|
|Order Information:||Web: http://www.springer.com/economics/economic+theory/journal/199/PS2|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Calvo, Guillermo A. & Reinhart, Carmen M. & Vegh, Carlos A., 1995.
"Targeting the real exchange rate: theory and evidence,"
Journal of Development Economics,
Elsevier, vol. 47(1), pages 97-133, June.
- Reinhart, Carmen & Calvo, Guillermo & Vegh, Carlos, 1994. "Targeting the real exchange rate," MPRA Paper 13765, University Library of Munich, Germany.
- Reinhart, Carmen & Calvo, Guillermo & Vegh, Carlos, 1994. "Targeting the real exchange rate: Theory and evidence," MPRA Paper 13412, University Library of Munich, Germany.
- Carlos A. VÃ©gh Gramont & Guillermo Calvo & Carmen Reinhart, 1994. "Targeting the Real Exchange Rate; Theory and Evidence," IMF Working Papers 94/22, International Monetary Fund.
- Carmen M. Reinhart & R. Todd Smith, 1996.
"Too much of a good thing: the macroeconomic effects of taxing capital inflows,"
Federal Reserve Bank of San Francisco, pages 436-464.
- Reinhart, Carmen & Smith, R. Todd, 1998. "Too much of a good thing: The macroeconomic effects of taxing capital inflows," MPRA Paper 13234, University Library of Munich, Germany.
- Sergio Rebelo & Carlos A. Vegh, 1995.
"Real Effects of Exchange Rate-Based Stabilization: An Analysis of Competing Theories,"
NBER Working Papers
5197, National Bureau of Economic Research, Inc.
- Sergio Rebelo & Carlos A. Vegh, 1995. "Real Effects of Exchange-Rate-Based Stabilization: An Analysis of Competing Theories," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 125-188 National Bureau of Economic Research, Inc.
- Rebelo, S. & Vegh, C.A., 1995. "Real Effects of Exchange-Rate-Based Stabilization: An Analysis of Competing Theories," RCER Working Papers 405, University of Rochester - Center for Economic Research (RCER).
- Rebelo, Sérgio, 1995. "Real Effects of Exchange-Rate-Based Stabilization: An Analysis of Competing Theories," CEPR Discussion Papers 1220, C.E.P.R. Discussion Papers.
- Amartya Lahiri, 1996.
"Exchange Rate Based Stabilizations Under Real Frictions: The role of endagenous labor supply,"
UCLA Economics Working Papers
759, UCLA Department of Economics.
- Lahiri, Amartya, 2001. "Exchange rate based stabilizations under real frictions: The role of endogenous labor supply," Journal of Economic Dynamics and Control, Elsevier, vol. 25(8), pages 1157-1177, August.
- Guidotti, Pablo E. & Vegh, Carlos A., 1992. "Macroeconomic interdependence under capital controls : A two-country model of dual exchange rates," Journal of International Economics, Elsevier, vol. 32(3-4), pages 353-367, May.
- Bacchetta, Philippe, 1990. "Temporary capital controls in a balance-of- payments crisis," Journal of International Money and Finance, Elsevier, vol. 9(3), pages 246-257, September.
- Akira Ariyoshi & Andrei Kirilenko & Inci Ã–tker & Bernard Laurens & Jorge IvÃ¡n Canales Kriljenko & Karl Friedrich Habermeier, 2000. "Capital Controls; Country Experiences with Their Use and Liberalization," IMF Occasional Papers 190, International Monetary Fund.
When requesting a correction, please mention this item's handle: RePEc:spr:joecth:v:34:y:2008:i:3:p:545-574. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)or (Rebekah McClure)
If references are entirely missing, you can add them using this form.