Capital Controls for Crisis Management Policy in a Global Economy

Jonathan Davis and Michael Devereux

American Economic Journal: Macroeconomics, 2022, vol. 14, issue 1, 60-82

Abstract: Capital controls may be justified as a policy to combat a financial crisis. But for large economies, capital controls may have substantial spillovers to the rest of the world. We investigate the case for capital controls in a large open economy, when domestic financial constraints may bind during a crisis. When the crisis country is indebted, it must trade off the desire to tax inflows to improve the terms of trade and tax outflows to ease financial constraints. This trade-off renders noncooperative use of capital controls ineffective as crisis management policy. Effective use of capital controls for crisis management requires international cooperation.

JEL-codes: F23 F38 F41 G01 H21 H25 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1257/mac.20200073

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