Capital Controls, Monetary Policy, and Balance Sheets in a Small Open Economy

Shigeto Kitano and Kenya Takaku
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Kenya Takaku: Faculty of International Studies, Hiroshima City University, Japan

No DP2015-10, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

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 underflexible exchange rates.

Keywords: Capital control; Monetary policy; Balance sheets; Ramsey policy; Exchange rate regimes; Small open economy; Nominal rigidities; New keynesian; DSGE; Welfare comparison; Incomplete markets; Financial accelerator; Financial frictions (search for similar items in EconPapers)
JEL-codes: E44 E52 F32 F38 F41 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2015-03, Revised 2017-10
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2015-10.pdf Revised version, 2017 (application/pdf)

Related works:
Journal Article: CAPITAL CONTROLS, MONETARY POLICY, AND BALANCE SHEETS IN A SMALL OPEN ECONOMY (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:kob:dpaper:dp2015-10

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