Capital Controls: a Normative Analysis

Anna Lipinska and Bianca De Paoli ()

No 861, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: Countries' concerns with the value of their currency have been extensively studied and documented in the literature. Capital controls can be (and often are) used as a tool to manage exchange rate áuctuations. This paper investigates whether countries can benefit from using such tool. We develop a welfare based analysis of whether (or, in fact, how) countries should tax international borrowing. Our results suggest that restricting international capital flows with the use of these taxes can be beneficial for individual countries although it would limit cross-border pooling of risk. This is because while consumption risk-pooling is important, individual countries also care about domestic output áuctuations. Moreover, the results show that countries decide to restrict the international flow of capital exactly when this flow is crucial to ensure cross-border risk-sharing. Our findings point to the possibility of costly "capital control wars" and, thus, significant gains from international policy coordination.

Date: 2013
New Economics Papers: this item is included in nep-cba and nep-opm
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Citations: View citations in EconPapers (35)

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Related works:
Working Paper: Capital controls: a normative analysis (2013)
Journal Article: Capital controls: a normative analysis (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:861

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