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Capital Controls or Macroprudential Regulation?

Listed author(s):
  • Anton Korinek
  • Damiano Sandri

We examine the effectiveness of capital controls versus macroprudential regulation in reducing financial fragility in a small open economy model in which there is excessive borrowing because of externalities associated with financial crises and contractionary exchange rate depreciations. We find that both types of instruments play distinct roles: macroprudential regulation reduces the indebtedness of leveraged borrowers whereas capital controls induce more precautionary behavior for the economy as a whole, including for savers. This reduces crisis risk by shoring up aggregate net worth and mitigating the transfer problem that occurs during crises. In advanced countries where the risk of large contractionary depreciations is more limited, the role for capital controls subsides. However, macroprudential regulation remains essential in our model to mitigate booms and busts in asset prices.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 20805.

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Date of creation: Dec 2014
Publication status: published as Capital Controls or Macroprudential Regulation? , Anton Korinek, Damiano Sandri. in NBER International Seminar on Macroeconomics 2015 , Devereux, Giavazzi, and West. 2016
Handle: RePEc:nbr:nberwo:20805
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