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Capital Controls as Macro-prudential Policy in a Large Open Economy

Author

Listed:
  • J. Scott Davis
  • Michael B. Devereux

Abstract

The literature on optimal capital controls for macro-prudential policy has focused on capital controls in a small open economy. This ignores the spillover effects to the rest of the world. This paper re-examines the case for capital controls in a large open economy, where domestic financial constraints may bind following a large negative shock. There is a tension between the desire to tax inflows to manipulate the terms of trade and tax outflows for macro-prudential purposes. Non-cooperative capital controls are ineffective as macro-prudential policy. Cooperative policy will ignore terms-of-trade manipulation and thus cooperative capital controls yield more effective macro-prudential policy.

Suggested Citation

  • J. Scott Davis & Michael B. Devereux, 2019. "Capital Controls as Macro-prudential Policy in a Large Open Economy," Globalization Institute Working Papers 358, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddgw:358
    DOI: 10.24149/gwp358
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    References listed on IDEAS

    as
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    3. Benigno, Gianluca & Chen, Huigang & Otrok, Christopher & Rebucci, Alessandro & Young, Eric R., 2016. "Optimal capital controls and real exchange rate policies: A pecuniary externality perspective," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 147-165.
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    More about this item

    Keywords

    Capital controls; large open economy; terms-of-trade; macroprudential; crisis management;

    JEL classification:

    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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