A Theory of Capital Controls as Dynamic Terms-of-Trade Manipulation

Arnaud Costinot, Guido Lorenzoni () and Iván Werning

Journal of Political Economy, 2014, vol. 122, issue 1, 77 - 128

Abstract: We develop a theory of capital controls as dynamic terms-of-trade manipulation. We study an infinite-horizon endowment economy with two countries. One country chooses taxes on international capital flows in order to maximize the welfare of its representative agent, while the other country is passive. We show that a country growing faster than the rest of the world has incentives to promote domestic savings by taxing capital inflows or subsidizing capital outflows. Although our theory of capital controls emphasizes interest rate manipulation, the pattern of borrowing and lending, per se, is irrelevant.

Date: 2014
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Working Paper: A Theory of Capital Controls as Dynamic Terms-of-Trade Manipulation (2011)
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