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On the Desirability of Capital Controls

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  • Jonathan Heathcote
  • Fabrizio Perri

Abstract

In a standard two-country international macro model, we ask whether imposing restrictions on international non contingent borrowing and lending is ever desirable. The answer is yes. If one country imposes capital controls unilaterally, it can generate favorable changes in the dynamics of equilibrium interest rates and the terms of trade, and thereby benefit at the expense of its trading partner. If both countries simultaneously impose capital controls, the welfare effects are ambiguous. We identify calibrations in which symmetric capital controls improve terms of trade insurance against country-specific shocks and thereby increase welfare for both countries.

Suggested Citation

  • Jonathan Heathcote & Fabrizio Perri, 2016. "On the Desirability of Capital Controls," Staff Report 523, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmsr:523
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. On the desirability of capital controls
      by Christian Zimmermann in NEP-DGE blog on 2015-11-24 22:37:46

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    Cited by:

    1. Davis, J. Scott & Presno, Ignacio, 2017. "Capital controls and monetary policy autonomy in a small open economy," Journal of Monetary Economics, Elsevier, vol. 85(C), pages 114-130.
    2. Stephanie Guichard, 2017. "10 Years after the Global Financial Crisis: What Have We Learnt About International Capital Flows?," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 8(03), pages 1-30, October.
    3. Varela, Liliana & Salomao, Juliana, 2018. "Exchange Rate Exposure and Firm Dynamics," The Warwick Economics Research Paper Series (TWERPS) 1157, University of Warwick, Department of Economics.
    4. Alessandria, George & Choi, Horag & Ruhl, Kim J., 2021. "Trade adjustment dynamics and the welfare gains from trade," Journal of International Economics, Elsevier, vol. 131(C).
    5. Shigeto Kitano & Kenya Takaku, 2019. "Gains from Policy Cooperation in Capital Controls and Financial Market Incompleteness," Discussion Paper Series DP2019-01, Research Institute for Economics & Business Administration, Kobe University.
    6. Valerio Nispi Landi & Alessandro Schiavone, 2021. "The Effectiveness of Capital Controls," Open Economies Review, Springer, vol. 32(1), pages 183-211, February.
    7. Johnson, Christopher P., 2021. "International shadow banking and prudential capital controls," Journal of International Money and Finance, Elsevier, vol. 119(C).
    8. Gurnain Kaur Pasricha, 2017. "Policy Rules for Capital Controls," BIS Working Papers 670, Bank for International Settlements.
    9. Mr. Pau Rabanal & Callum Jones, 2021. "Credit Cycles, Fiscal Policy, and Global Imbalances," IMF Working Papers 2021/043, International Monetary Fund.
    10. Chen, William & Phelan, Gregory, 2021. "International coordination of macroprudential policies with capital flows and financial asymmetries," Journal of Financial Stability, Elsevier, vol. 56(C).
    11. Beshkar, Mostafa & Shourideh, Ali, 2020. "Optimal trade policy with trade imbalances," Journal of Monetary Economics, Elsevier, vol. 109(C), pages 65-82.
    12. McNelis, Paul D., 2016. "Optimal policy rules at home, crisis and quantitative easing abroad," BOFIT Discussion Papers 15/2016, Bank of Finland, Institute for Economies in Transition.
    13. 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.
    14. Sebastián Fanelli & Ludwig Straub, 2021. "A Theory of Foreign Exchange Interventions [The Cost of Foreign Exchange Intervention: Concepts and Measurement]," Review of Economic Studies, Oxford University Press, vol. 88(6), pages 2857-2885.
    15. Andrzej Wojtyna, 2017. "Nowa faza dyskusji o kontroli międzynarodowych przepływów kapitału," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 6, pages 5-29.
    16. Agénor, Pierre-Richard & Jia, Pengfei, 2020. "Capital controls and welfare with cross-border bank capital flows," Journal of Macroeconomics, Elsevier, vol. 65(C).
    17. 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.
    18. Lorenzo Menna & Martin Tobal, 2018. "Financial and price stability in emerging markets: the role of the interest rate," BIS Working Papers 717, Bank for International Settlements.
    19. Fang, Xiang & Liu, Yang, 2021. "Volatility, intermediaries, and exchange rates," Journal of Financial Economics, Elsevier, vol. 141(1), pages 217-233.
    20. Nispi Landi, Valerio, 2020. "Capital controls spillovers," Journal of International Money and Finance, Elsevier, vol. 109(C).
    21. Pasricha, Gurnain K., 2022. "Estimated policy rules for capital controls," Journal of International Money and Finance, Elsevier, vol. 122(C).
    22. Waheed, Farah & Abdul Rashid,, 2021. "Credit frictions, fiscal imbalances, monetary policy autonomy, and monetary policy rules," The Journal of Economic Asymmetries, Elsevier, vol. 23(C).
    23. Shigeto Kitano & Kenya Takaku, 2020. "Financial Market Incompleteness and International Cooperation on Capital Controls," Discussion Paper Series DP2020-05, Research Institute for Economics & Business Administration, Kobe University, revised Oct 2021.

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    More about this item

    Keywords

    Terms of trade; Capital controls; International risk sharing;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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