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Capital Controls or Macroprudential Regulation?

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  • Anton Korinek
  • Damiano Sandri

Abstract

International capital flows can create significant financial instability in emerging economies because of pecuniary externalities associated with exchange rate movements. Does this make it optimal to impose capital controls or should policymakers rely on domestic macroprudential regulation? This paper presents a tractable model to show that it is desirable to employ both types of instruments: Macroprudential regulation reduces overborrowing, while capital controls increase the aggregate net worth of the economy as a whole by also stimulating savings. The two policy measures should be set higher the greater an economy's debt burden and the higher domestic inequality. In our baseline calibration based on the East Asian crisis countries, we find optimal capital controls and macroprudential regulation in the magnitude of 2 percent. In advanced countries where the risk of sharp exchange rate depreciations is more limited, the role for capital controls subsides. However, macroprudential regulation remains essential to mitigate booms and busts in asset prices.

Suggested Citation

  • Anton Korinek & Damiano Sandri, 2015. "Capital Controls or Macroprudential Regulation?," IMF Working Papers 15/218, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:15/218
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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. Gurnain Pasricha, 2017. "Policy Rules for Capital Controls," Staff Working Papers 17-42, Bank of Canada.
    3. Engel, Charles, 2016. "Macroprudential policy under high capital mobility: policy implications from an academic perspective," Journal of the Japanese and International Economies, Elsevier, vol. 42(C), pages 162-172.
    4. repec:eee:inecon:v:111:y:2018:i:c:p:61-80 is not listed on IDEAS
    5. repec:eee:jeborg:v:142:y:2017:i:c:p:140-163 is not listed on IDEAS
    6. Salih Fendoglu, 2016. "Credit cycles and macroprudential policy framework in emerging countries," BIS Papers chapters,in: Bank for International Settlements (ed.), Macroprudential policy, volume 86, pages 17-25 Bank for International Settlements.
    7. Shigeto Kitano & Kenya Takaku, "undated". "Capital Controls, Macroprudential Regulation,and the Bank Balance Sheet Channel," Discussion Paper Series DP2017-18, Research Institute for Economics & Business Administration, Kobe University.
    8. Everett Grant, 2016. "Exposure to international crises: trade vs. financial contagion," ESRB Working Paper Series 30, European Systemic Risk Board.
    9. Beckmann, Joscha & Czudaj, Robert, 2017. "Capital flows and GDP in emerging economies and the role of global spillovers," Journal of Economic Behavior & Organization, Elsevier, vol. 142(C), pages 140-163.
    10. 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.
    11. Gurnain Kaur Pasricha, 2017. "Policy Rules for Capital Controls," BIS Working Papers 670, Bank for International Settlements.
    12. Jin Cao & Valeriya Dinger, 2018. "Financial Globalization and Bank Lending: The Limits of Domestic Monetary Policy?," CESifo Working Paper Series 6900, CESifo Group Munich.
    13. Gupta,Poonam - DECOS, 2016. "Capital flows and central banking : the Indian experience," Policy Research Working Paper Series 7569, The World Bank.
    14. Fernando Avalos & Ramon Moreno & Tania Romero, 2015. "Leverage on the buy side," BIS Working Papers 517, Bank for International Settlements.
    15. repec:eee:inecon:v:109:y:2017:i:c:p:43-67 is not listed on IDEAS
    16. Anton Korinek, 2017. "Regulating Capital Flows to Emerging Markets: An Externality View," NBER Working Papers 24152, National Bureau of Economic Research, Inc.
    17. Nadav Ben Zeev, 2017. "Exchange Rate Regimes And Sudden Stops," Working Papers 1712, Ben-Gurion University of the Negev, Department of Economics.
    18. repec:eee:jbfina:v:79:y:2017:i:c:p:110-128 is not listed on IDEAS

    More about this item

    Keywords

    Borrowing; East Asia; Capital controls; Emerging markets; Exchange rate depreciation; Financial stability; Domestic savings; Econometric models; Financial crises; Macroprudential policies and financial stability; pecuniary externalities; macroprudential regulation; inequality; exchange rate; exchange; lenders; borrowers; markets; International Lending and Debt Problems; Open Economy Macroeconomics; Financial Markets and the Macroeconomy; inequality.;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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