Capital Controls or Real Exchange Rate Policy? A Pecuniary Externality Perspective

Eric Young, Alessandro Rebucci () and Christopher Otrok

No 641, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: In the aftermath of the global financial crisis, a new policy paradigm has emerged in which old-fashioned policies such as capital controls and other government distortions have become part of the standard policy toolkit (the so-called macro-prudential policies). On the wave of this seemingly unanimous policy consensus, a new strand of theoretical literature contends that capital controls are welfare enhancing and can be justified rigorously because of second-best considerations. Within the same theoretical framework adopted in this fast-growing literature, we show that a credible commitment to support the exchange rate in crisis times always welfare-dominates prudential capital controls as it can achieve the unconstrained allocation.

Date: 2013
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (19)

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Working Paper: Capital Controls or Real Exchange Rate Policy?: A Pecuniary Externality Perspective (2013)
Working Paper: Capital Controls or Real Exchange Rate Policy? A Pecuniary Externality Perspective (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:641

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