Capital Controls as a Credit Policy Tool in a Small Open Economy

Shigeto Kitano and Kenya Takaku
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Kenya Takaku: Faculty of International Studies, Hiroshima City University, Japan

No DP2016-11, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: We incorporate a banking sector with balance sheet frictions into a model of a small open economy and compare the effectiveness of capital controls and that of macroprudential regulation. We show that the welfare-improving effect of capital controls is larger than that of macroprudential regulation if the degree of financial friction between domestic banks and foreign investors is high, whereas the welfare-improving effect of macroprudential regulation is larger than that of capital controls if the degree of financial friction is low. Comparing two economies, one with and one without "liability dollarization," we also find that the welfare-improving effect of capital controls is larger than that of macroprudential regulation in the presence of "liability dollarization."

Keywords: Capital control; Credit policy; Balance sheets; Small open economy; Nominal rigidities; New Keynesian; DSGE; Financial intermediaries; Financial frictions; Crisis (search for similar items in EconPapers)
JEL-codes: E44 E58 F32 F38 F41 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2016-03, Revised 2017-07
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2016-11.pdf Revised version, 2017 (application/pdf)

Related works:
Journal Article: Capital controls as a credit policy tool in a small open economy (2018)
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