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Capital Controls as an Instrument of Monetary Policy

Listed author(s):
  • Ignacio Presno

    (Universidad de Montevideo)

  • Scott Davis

    (Federal Reserve Bank of Dallas)

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.

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File URL: https://economicdynamics.org/meetpapers/2015/paper_1167.pdf
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Paper provided by Society for Economic Dynamics in its series 2015 Meeting Papers with number 1167.

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Date of creation: 2015
Handle: RePEc:red:sed015:1167
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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