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Capital controls and international financial stability: a dynamic general equilibrium analysis in incomplete markets

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  • Buss, Adrian

Abstract

In this paper, we conduct an analysis of the implications of capital controls for financial stability. We study a financial transaction (Tobin) tax applicable to cross-border capital flows in a multi-good, multi-country dynamic equilibrium model with incomplete financial markets and heterogeneous agents. The results derived from the model suggest that the impact of capital controls may vary considerably across market segments. In currency markets, capital controls reduce the volatility. However, in international stock markets, their introduction amplifies price movements, thus, increases the volatility; but it reduces a country's vulnerability to external shocks, thereby limiting spillover effects. JEL Classification: F21, F31, G12, G15

Suggested Citation

  • Buss, Adrian, 2013. "Capital controls and international financial stability: a dynamic general equilibrium analysis in incomplete markets," Working Paper Series 1578, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20131578
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    Keywords

    capital controls; Financial Stability; financial transaction (Tobin) tax; general equilibrium; incomplete financial markets;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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