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Optimal capital controls and real exchange rate policies: a pecuniary externality perspective

Gianluca Benigno, Huigang Chen, Christopher Otrok (), Alessandro Rebucci () and Eric Young ()

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: A new literature studies the use of capital controls to prevent financial crises. Within this new framework, we show that when exchange rate policy is costless, there is no need for capital controls. However, if exchange rate policy entails efficiency costs, capital controls become part of the optimal policy mix. When exchange rate policy is costly, the optimal mix combines prudential capital controls in tranquil times with policies that limit exchange rate depreciation in crisis times. The optimal mix yields more borrowing, fewer and less severe financial crises, and much higher welfare than with capital controls alone.

Keywords: capital controls; exchange rate policy; financial frictions; financial crises; financial stability; optimal taxation; macro-prudential policies; ES/I024174/1; 0044709 (search for similar items in EconPapers)
JEL-codes: N0 F3 G3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mon and nep-opm
Date: 2016-12-01
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Published in Journal of Monetary Economics, 1, December, 2016, 84, pp. 147-165. ISSN: 0304-3932

Downloads: (external link)
http://eprints.lse.ac.uk/68594/ Open access version. (application/pdf)

Related works:
Journal Article: Optimal capital controls and real exchange rate policies: A pecuniary externality perspective (2016) Downloads
Working Paper: Optimal Capital Controls and Real Exchange Rate Policies: A Pecuniary Externality Perspective (2016) Downloads
Working Paper: Optimal Capital Controls and Real Exchange Rate Policies: A Pecuniary Externality Perspective (2015) Downloads
Working Paper: Optimal capital controls and real exchange rate policies: A pecuniary externality perspective (2015) Downloads
Working Paper: Optimal Capital Controls and Real Exchange Rate Policies: A Pecuniary Externality Perspective (2014) Downloads
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