Article ID Journal Published Year Pages File Type
5101546 Journal of Monetary Economics 2016 19 Pages PDF
Abstract
A new literature studies the use of capital controls to prevent financial crises. Within this new framework, we show that when exchange rate policy is costless, there is no need for capital controls. However, if exchange rate policy entails efficiency costs, capital controls become part of the optimal policy mix. When exchange rate policy is costly, the optimal mix combines prudential capital controls in tranquil times with policies that limit exchange rate depreciation in crisis times. The optimal mix yields more borrowing, fewer and less severe financial crises, and much higher welfare than with capital controls alone.
Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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