Capital Flows, Beliefs, and Capital Controls

Olena Rarytska and Viktor Tsyrennikov

No 250031, Working Papers from Cornell University, Department of Applied Economics and Management

Abstract: Belief heterogeneity generates speculative cross-border capital flows that are much larger than flows generated by the hedging/insurance motives. We show theoretically that limiting financial trades may gen- erate welfare gains despite inhibiting insurance possibilities. Financial constraints tame speculation forces, limit movements of the net for- eign wealth positions, and thus reduce consumption volatility. This provides a novel justification for capital controls. Simulations indicate that welfare gains from imposing capital con- trols can be substantial, equivalent to a permanent consumption in- crease of up to 4%, or 80 times the cost of business cycles. Controls that activate only during substantial inflows or outflows are preferred to those constantly active, e.g. a transaction tax used by some emerg- ing market economies. Yet, despite improving macroeconomic stability capital controls may unintentionally lead to increased volatility in the domestic financial markets.

Keywords: International; Relations/Trade (search for similar items in EconPapers)
Pages: 34
Date: 2016-04
New Economics Papers: this item is included in nep-dge, nep-ifn, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://ageconsearch.umn.edu/record/250031/files/Cornell-Dyson-wp1609.pdf (application/pdf)

Related works:
Working Paper: Capital Flows, Beliefs, and Capital Controls (2018)
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:ags:cudawp:250031

DOI: 10.22004/ag.econ.250031

Access Statistics for this paper

More papers in Working Papers from Cornell University, Department of Applied Economics and Management Contact information at EDIRC.
Bibliographic data for series maintained by AgEcon Search ().