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Capital Controls or Real Exchange Rate Policy?: A Pecuniary Externality Perspective

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

No 4246, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: In the aftermath of the global financial crisis, a new policy paradigm has emerged in which old-fashioned policies such as capital controls and other government distortions have become part of the standard policy tool kit (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 justified rigorously because of second-best considerations. Within the same theoretical framework adopted in this fast-growing literature, this paper shows that a credible commitment to support the exchange rate in crisis times always welfare-dominates prudential capital controls, as it can achieve unconstrained allocation.

Keywords: IDB-WP-393 (search for similar items in EconPapers)
JEL-codes: E52 F37 F41 (search for similar items in EconPapers)
Date: 2013-05
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Working Paper: Capital Controls or Real Exchange Rate Policy? A Pecuniary Externality Perspective (2013) Downloads
Working Paper: Capital Controls or Real Exchange Rate Policy? A Pecuniary Externality Perspective (2013) Downloads
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