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Capital controls or exchange rate policy? a pecuniary externality perspective

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

No 2012-025, Working Papers from Federal Reserve Bank of St. Louis

Abstract: In the aftermath of the global nancial crisis, a new policy paradigm has emerged> in which old-fashioned policies such as capital controls and other government distor-> tions have become part of the standard policy toolkit (the so-called macro-prudential> policies). On the wave of this seemingly unanimous policy consensus, a new strand> of theoretical literature contends that capital controls are welfare enhancing and can> be justi ed rigorously because of second-best considerations. Within the same the-> oretical framework adopted in this fast-growing literature, we show that a credible> commitment to support the exchange rate in crisis times always welfare-dominates> prudential capital controls as it can achieve the rst best unconstrained allocation.> In this benchmark economy, prudential capital controls are optimal only when the set> of policy tools is restricted so that they are the only policy instrument available.

Keywords: Foreign exchange rates; Capital market (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mon and nep-opm
Date: 2012
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Working Paper: Capital Controls or Exchange Rate Policy? A Pecuniary Externality Perspective (2012) Downloads
Working Paper: Capital controls or exchange rate policy? A pecuniary externality perspective (2012) Downloads
Working Paper: Capital Controls or Exchange Rate Policy? A Pecuniary Externality Perspective (2012) Downloads
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