 A new approach to capital control for emerging market economiesFernando Garcia-Barragan and Guangling Liu The North American Journal of Economics and Finance, 2022, vol. 61, issue C Abstract: The present paper proposes a new approach to capital control for emerging market economies, which restricts capital inflows to a fraction of the gap between foreign currency denominated loans and deposits in the economy. We show that the foreign-currency-gap capital control proposed here outperforms tax-based capital control in attenuating the negative effects of external shocks on business cycle fluctuations. This attenuation effect works via the interest rate channel and the capital control constraint itself. Compared to tax-based capital control, the foreign-currency-gap capital control is welfare enhancing, effectively mitigating financial instability with little cost in terms of macroeconomic stability. Countries with a high level of foreign currency denominated loans and deposits need to implement a stricter foreign-currency-gap capital control. Keywords: Capital control; Foreign currency denomination; Open economy macroeconomics; Financial friction; Welfare analysis; Emerging market economy; DSGE (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:61:y:2022:i:c:s106294082200050x DOI: 10.1016/j.najef.2022.101696 Access Statistics for this article The North American Journal of Economics and Finance is currently edited by Hamid Beladi More articles in The North American Journal of Economics and Finance from Elsevier |
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