Capital Controls or Macroprudential Regulation?

Anton Korinek and Damiano Sandri

No 2015/218, IMF Working Papers from International Monetary Fund

Abstract: International capital flows can create significant financial instability in emerging economies because of pecuniary externalities associated with exchange rate movements. Does this make it optimal to impose capital controls or should policymakers rely on domestic macroprudential regulation? This paper presents a tractable model to show that it is desirable to employ both types of instruments: Macroprudential regulation reduces overborrowing, while capital controls increase the aggregate net worth of the economy as a whole by also stimulating savings. The two policy measures should be set higher the greater an economy's debt burden and the higher domestic inequality. In our baseline calibration based on the East Asian crisis countries, we find optimal capital controls and macroprudential regulation in the magnitude of 2 percent. In advanced countries where the risk of sharp exchange rate depreciations is more limited, the role for capital controls subsides. However, macroprudential regulation remains essential to mitigate booms and busts in asset prices.

Keywords: WP; exchange rate; Financial stability; pecuniary externalities; capital controls; macroprudential regulation; inequality; exchange rate depreciation; covariance term; wedge terms; marginal utility; asset price externality; exchange rate fluctuation; exchange rate effect; simplifying terms; resource constraint; asset purchase; price change; Exchange rates; Real exchange rates; Asset prices; Consumption; East Asia (search for similar items in EconPapers)
Pages: 35
Date: 2015-10-01
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Citations: View citations in EconPapers (6)

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Related works:
Chapter: Capital Controls or Macroprudential Regulation? (2016)
Journal Article: Capital controls or macroprudential regulation? (2016)
Working Paper: Capital Controls or Macroprudential Regulation? (2014)
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