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Capital Controls as Macro-prudential Policy in a Large Open Economy

Jonathan Davis () and Michael Devereux ()

No 358, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: The literature on optimal capital controls for macro-prudential policy has focused on capital controls in a small open economy. This ignores the spillover effects to the rest of the world. This paper re-examines the case for capital controls in a large open economy, where domestic financial constraints may bind following a large negative shock. There is a tension between the desire to tax inflows to manipulate the terms of trade and tax outflows for macro-prudential purposes. Non-cooperative capital controls are ineffective as macro-prudential policy. Cooperative policy will ignore terms-of-trade manipulation and thus cooperative capital controls yield more effective macro-prudential policy.

Keywords: terms-of-trade; macroprudential; crisis management; Capital controls; large open economy (search for similar items in EconPapers)
JEL-codes: F40 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2019-03-27, Revised 2019-03-27
New Economics Papers: this item is included in nep-cba, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:358

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DOI: 10.24149/gwp358

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