Optimal Capital Controls and Real Exchange Rate Policies: A Pecuniary Externality Perspective
Christopher Otrok (),
Alessandro Rebucci () and
Eric Young ()
No 9936, CEPR Discussion Papers from C.E.P.R. Discussion Papers
In response to the global financial crisis a new policy paradigm emerged in which capital controls and other quantitative restrictions on credit flows have become part of the standard crisis prevention policy toolkit. A new strand of theoretical literature studies the use of capital controls in a context in which pecuniary externality justifies policy interventions. Within the same theoretical framework adopted in this literature, we show that the optimal design of crisis prevention (ex-ante) policies depends on the effectivness of crisis management (ex-post) policies. This interaction between ex-ante and ex-post policies gives rise to a new rationale for the use of capital controls. Specifically, we show that when ex-post policies are effective in containing crises, there is no need to intervene ex-ante with capital controls. On the other hand, if crises management policies entail efficiency costs and hence lose effectiveness, then the optimal policy mix consists of both ex-ante and ex-post interventions so that crises prevention policies become desirable. In our model, the optimal policy mix combines capital controls in tranquil times with real exchange rate support to limit its depreciation during crises times and yields welfare gains of more than 1% in consumption equivalence terms.
Keywords: Capital Controls; Financial Crises; Financial Frictions; Macro-prudential policies; Pecuniary Externality; Real Exchange Rate (search for similar items in EconPapers)
JEL-codes: E52 F37 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12) Track citations by RSS feed
Downloads: (external link)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at email@example.com
Journal Article: Optimal capital controls and real exchange rate policies: A pecuniary externality perspective (2016)
Working Paper: Optimal capital controls and real exchange rate policies: a pecuniary externality perspective (2016)
Working Paper: Optimal Capital Controls and Real Exchange Rate Policies: A Pecuniary Externality Perspective (2016)
Working Paper: Optimal Capital Controls and Real Exchange Rate Policies: A Pecuniary Externality Perspective (2015)
Working Paper: Optimal capital controls and real exchange rate policies: A pecuniary externality perspective (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:9936
Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=9936
Access Statistics for this paper
More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().