Crises and capital controls in small open economies: a stock–flow consistent approach

Hamid Raza, Bjorn Runar Gudmundsson, Gylfi Zoega and Mikael Randrup Byrialsen
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Hamid Raza: Aalborg University, Denmark
Bjorn Runar Gudmundsson: Statistics Iceland, Reykjavik, Iceland
Mikael Randrup Byrialsen: Aalborg University, Denmark

European Journal of Economics and Economic Policies: Intervention, 2019, vol. 16, issue 1, 94-133

Abstract: This paper attempts to explain the role of capital inflows in creating economic booms and busts in a small open economy with sovereign currency. We develop a stock–flow consistent (SFC) model for a small open economy while relying on the experience of the Icelandic crisis. We demonstrate the destabilising effects of capital inflows on the economy by allowing for a sudden stop, and also discuss the role of capital controls as a policy response in the event of a crisis due to sudden stops. Finally, we discuss the policy implications of our results in order to tackle the destabilising effects associated with financial flows in a small economy.

Keywords: post-Keynesian; stock–flow consistent; monetary policy; capital controls; sudden stops; financial crisis (search for similar items in EconPapers)
JEL-codes: E12 F32 F38 F41 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:elg:ejeepi:v:16:y:2019:i:1:p94-133

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