CAPITAL CONTROLS, MONETARY POLICY, AND BALANCE SHEETS IN A SMALL OPEN ECONOMY

Shigeto Kitano and Kenya Takaku

Economic Inquiry, 2018, vol. 56, issue 2, 859-874

Abstract: We develop a small open economy, New Keynesian model that incorporates a financial accelerator in combination with liability dollarization. Applying a Ramsey‐type analysis, we compare the welfare implications of an optimal monetary policy under flexible exchange rates and an optimal capital control policy under fixed exchange rates. In an economy without the financial accelerator, an optimal monetary policy under flexible exchange rates is superior to an optimal capital control policy under fixed exchange rates. In contrast, in an economy with the financial accelerator, an optimal capital control under fixed exchange rates yields higher welfare than an optimal monetary policy under flexible exchange rates.(JEL E44, E52, F32, F38, F41)

Date: 2018
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https://doi.org/10.1111/ecin.12544

Related works:
Working Paper: Capital Controls, Monetary Policy, and Balance Sheets in a Small Open Economy (2017)
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