Capital controls and trade policy

Simon Lloyd and Emile A. Marin

Journal of International Economics, 2024, vol. 151, issue C

Abstract: How does optimal capital-flow management change with prevailing trade policies? We study the joint optimal determination of capital controls and trade tariffs in a two-country, two-good model with trade in goods and assets. Because countries are large in both markets, a country-planner can achieve higher domestic welfare by departing from free trade in addition to levying capital controls, despite the cooperative optimal allocation being efficient. However, time variation in the optimal tariff induces households to over- or under-borrow through its effects on the path of the real exchange rate. As a result, optimal capital controls are generally smaller when trade policy is constrained (i.e., by a Free-Trade Agreement), but, absent retaliation, can be larger depending on the paths of underlying fundamentals.

Keywords: Capital-flow management; Free-trade agreements; Ramsey policy; Tariffs; Trade policy (search for similar items in EconPapers)
JEL-codes: F13 F32 F33 F38 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Capital Controls and Trade Policy (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:151:y:2024:i:c:s0022199624000928

DOI: 10.1016/j.jinteco.2024.103965

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