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Financial market incompleteness and international cooperation on capital controls

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  • Shigeto Kitano
  • Kenya Takaku

Abstract

We examine how the degree of financial market incompleteness affects welfare gains from international cooperation on capital controls. When financial markets are incomplete, international risk sharing is disturbed. However, the optimal global policy significantly reverses the welfare deterioration due to inefficient risk sharing. We show that when financial markets are more incomplete, the welfare gap between the optimal global policy and the Nash equilibrium increases, and the welfare gains from international cooperation on capital controls then become larger.

Suggested Citation

  • Shigeto Kitano & Kenya Takaku, 2022. "Financial market incompleteness and international cooperation on capital controls," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(4), pages 624-642, December.
    • Handle: RePEc:bla:ijethy:v:18:y:2022:i:4:p:624-642
    DOI: 10.1111/ijet.12331
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    Cited by:

    1. Takashi Kamihigashi, 2022. "Introduction to the special feature section on economic policy and risk management," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(4), pages 552-553, December.

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    More about this item

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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