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Capital Controls as an Instrument of Monetary Policy

Author

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  • Ignacio Presno

    (Universidad de Montevideo)

  • Scott Davis

    (Federal Reserve Bank of Dallas)

Abstract

Large swings in capital flows into and out of emerging markets can potentially lead to excessive volatility in asset prices and credit supply. In order to lessen the impact of capital flows on financial instability, a number of researchers and policy makers have recently proposed the use of capital controls. This paper considers the benefit of adding capital controls as a potential instrument of monetary policy in a small open economy. In a DSGE framework, we find that when domestic agents are subject to collateral constraints and the value of collateral is subject to fluctuations driven by foreign capital inflows and outflows, the adoption of temporary capital controls can lead to a significant welfare improvement. The benefits of capital controls are present even when monetary policy is determined optimally, implying that there may be a role for capital controls to exist side-by-side with conventional monetary tools as an instrument of monetary policy.

Suggested Citation

  • Ignacio Presno & Scott Davis, 2015. "Capital Controls as an Instrument of Monetary Policy," 2015 Meeting Papers 1167, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:1167
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    References listed on IDEAS

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    Cited by:

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    2. Debarsy, Nicolas & Dossougoin, Cyrille & Ertur, Cem & Gnabo, Jean-Yves, 2018. "Measuring sovereign risk spillovers and assessing the role of transmission channels: A spatial econometrics approach," Journal of Economic Dynamics and Control, Elsevier, vol. 87(C), pages 21-45.
    3. Agénor, Pierre-Richard & Jia, Pengfei, 2020. "Capital controls and welfare with cross-border bank capital flows," Journal of Macroeconomics, Elsevier, vol. 65(C).
    4. J. Scott Davis, 2015. "The Trilemma in Practice: Monetary Policy Autonomy in an Economy with a Floating Exchange Rate," Annual Report, Globalization and Monetary Policy Institute, Federal Reserve Bank of Dallas, pages 2-9.
    5. Dr. Nihal Bayraktar, 2015. "Importance of Investment Climates for Inflows of Foreign Direct Investment in Developing Countries," Business and Economic Research, Macrothink Institute, vol. 5(1), pages 24-50, June.
    6. Shigeto Kitano & Kenya Takaku, 2017. "Capital Controls and Financial Frictions in a Small Open Economy," Open Economies Review, Springer, vol. 28(4), pages 761-793, September.
    7. Shigeto Kitano & Kenya Takaku, 2018. "Capital Controls, Monetary Policy, And Balance Sheets In A Small Open Economy," Economic Inquiry, Western Economic Association International, vol. 56(2), pages 859-874, April.
    8. Montecino, Juan Antonio, 2018. "Capital controls and the real exchange rate: Do controls promote disequilibria?," Journal of International Economics, Elsevier, vol. 114(C), pages 80-95.
    9. Eichengreen, Barry & Rose, Andrew, 2014. "Capital Controls in the 21st Century," Journal of International Money and Finance, Elsevier, vol. 48(PA), pages 1-16.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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

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