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Capital Controls and Trade Policy

In: International Fragmentation, Supply Chains, and Financial Frictions

Author

Listed:
  • Simon P. Lloyd
  • Emile A. Marin

Abstract

How does optimal capital-flow management change with prevailing trade policies? We study the joint optimal determination of capital controls and trade tariffs in a two-country, two-good model with trade in goods and assets. Because countries are large in both markets, a country-planner can achieve higher domestic welfare by departing from free trade in addition to levying capital controls, despite the cooperative optimal allocation being efficient. However, time variation in the optimal tariff induces households to over- or under-borrow through its effects on the path of the real exchange rate. As a result, optimal capital controls are generally smaller when trade policy is constrained (i.e., by a Free-Trade Agreement), but, absent retaliation, can be larger depending on the paths of underlying fundamentals.
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Suggested Citation

  • Simon P. Lloyd & Emile A. Marin, 2023. "Capital Controls and Trade Policy," NBER Chapters, in: International Fragmentation, Supply Chains, and Financial Frictions, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberch:15281
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    Cited by:

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    2. Geyue Sun & Xiao Liu & Tomas Williams & Roberto Samaniego, 2025. "Learning to Regulate: A New Event-Level Dataset of Capital Control Measures," Papers 2505.23025, arXiv.org.

    More about this item

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls

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