Capital Controls and Welfare with Cross-Border Bank Capital Flows

Pierre-Richard Agénor and Pengfei Jia

Centre for Growth and Business Cycle Research Discussion Paper Series from Economics, The University of Manchester

Abstract: This paper studies the performance of time-varying capital controls on cross-border bank borrowing in an open-economy, dynamic stochastic general equilibrium model with credit market frictions and imperfect capital mobility. The model is calibrated for a middle-income country and is shown to replicate the main stylized facts associated with a fall in world interest rates (capital inflows, real appreciation, credit boom, asset price pressures, and output expansion). A capital controls rule, which is fundamentally macroprudential in nature, is defined in terms of either changes in bank foreign borrowing or cyclical output. An optimal, welfare-maximizing rule is established numerically. The analysis is then extended to solve jointly for optimal countercyclical reserve requirements and capital controls rules. These instruments are complements in the sense that both are needed to maximize welfare. However, a more aggressive reserve requirement rule (which responds to the credit-output ratio) also induces less reliance on capital controls. Thus, at the margin, countercyclical reserve requirements and capital controls are partial substitutes in maximizing welfare.

Pages: 41 pages
Date: 2015
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://hummedia.manchester.ac.uk/schools/soss/cgb ... apers/dpcgbcr212.pdf (application/pdf)

Related works:
Journal Article: Capital controls and welfare with cross-border bank capital flows (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:man:cgbcrp:212

Access Statistics for this paper

More papers in Centre for Growth and Business Cycle Research Discussion Paper Series from Economics, The University of Manchester Contact information at EDIRC.
Bibliographic data for series maintained by Patrick Macnamara ().