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Capital Controls and Monetary Policy Autonomy in a Small Open Economy

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Abstract

Is there a link between capital controls and monetary policy autonomy in a country with a floating currency? Shocks to capital flows into a small open economy lead to volatility in asset prices and credit supply. To lessen the impact of capital flows on financial instability, a central bank finds it optimal to use the domestic interest rate to \"manage\" the capital account. Capital account restrictions affect the behavior of optimal monetary policy following shocks to the foreign interest rate. Capital controls allow optimal monetary policy to focus less on the foreign interest rate and more on domestic variables.

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  • J. Scott Davis & Ignacio Presno, 2017. "Capital Controls and Monetary Policy Autonomy in a Small Open Economy," International Finance Discussion Papers 1190, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:1190
    DOI: 10.17016/IFDP.2017.1190
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    Cited by:

    1. Chan Wang & Gang Yi, 2019. "Bank Runs and Business Cycles in a Small Open Economy," Annals of Economics and Finance, Society for AEF, vol. 20(2), pages 847-865, November.
    2. Scott Davis, J. & Zlate, Andrei, 2019. "Monetary policy divergence and net capital flows: Accounting for endogenous policy responses," Journal of International Money and Finance, Elsevier, vol. 94(C), pages 15-31.
    3. J. Scott Davis & Ippei Fujiwara & Kevin X.D. Huang & Jiao Wang, 2019. "Foreign exchange reserves as a tool for capital account management," Vanderbilt University Department of Economics Working Papers 19-00004, Vanderbilt University Department of Economics.
    4. Kitano, Shigeto & Takaku, Kenya, 2020. "Capital controls, macroprudential regulation, and the bank balance sheet channel," Journal of Macroeconomics, Elsevier, vol. 63(C).
    5. Beshkar, Mostafa & Shourideh, Ali, 2020. "Optimal trade policy with trade imbalances," Journal of Monetary Economics, Elsevier, vol. 109(C), pages 65-82.
    6. Zheng Liu & Mark M. Spiegel & Jingyi Zhang, 2018. "Optimal Capital Account Liberalization in China," Working Paper Series 2018-10, Federal Reserve Bank of San Francisco.
    7. Valerio Nispi Landi, 2017. "Capital controls, macroprudential measures and monetary policy interactions in an emerging economy," Temi di discussione (Economic working papers) 1154, Bank of Italy, Economic Research and International Relations Area.
    8. Lorena Keller, 2018. "Prudential Capital Controls and Risk Misallocation: Bank Lending Channel," 2018 Meeting Papers 129, Society for Economic Dynamics.
    9. Agénor, Pierre-Richard & Jia, Pengfei, 2020. "Capital controls and welfare with cross-border bank capital flows," Journal of Macroeconomics, Elsevier, vol. 65(C).
    10. Alfred V. Guender & Hamish McHugh-Smith, 2020. "Financial Openness and Inflation: An Empirical Analysis," Working Papers in Economics 20/18, University of Canterbury, Department of Economics and Finance.
    11. Rohit, Abhishek Kumar & Dash, Pradyumna, 2019. "Dynamics of monetary policy spillover: The role of exchange rate regimes," Economic Modelling, Elsevier, vol. 77(C), pages 276-288.
    12. Nispi Landi, Valerio, 2020. "Capital controls spillovers," Journal of International Money and Finance, Elsevier, vol. 109(C).
    13. Dennis Bonam & Gavin Goy & Emmanuel de Veirman, 2020. "Should developed economies manage international capital flows?," DNB Working Papers 702, Netherlands Central Bank, Research Department.
    14. Ben Zeev, Nadav, 2017. "Capital controls as shock absorbers," Journal of International Economics, Elsevier, vol. 109(C), pages 43-67.
    15. Piotr J Szpunar, 2020. "How to benefit from financial deepening while preserving financial and macroeconomic stability: the case of Poland," BIS Papers chapters, in: Bank for International Settlements (ed.),Financial market development, monetary policy and financial stability in emerging market economies, volume 113, pages 243-254, Bank for International Settlements.
    16. Scott Davis & Andrei Zlate, 2017. "Monetary Policy Divergence, Net Capital Flows, and Exchange Rates: Accounting for Endogenous Policy Responses," Globalization Institute Working Papers 328, Federal Reserve Bank of Dallas.
    17. Nadav Ben Zeev, 2017. "Exchange Rate Regimes And Sudden Stops," Working Papers 1712, Ben-Gurion University of the Negev, Department of Economics.

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    More about this item

    Keywords

    Capital controls; Credit constraints; Small open economy;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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