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Financial Market Incompleteness and International Cooperation on Capital Controls

Shigeto Kitano () and Kenya Takaku
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Kenya Takaku: Faculty of International Studies, Hiroshima City University, Japan

No DP2020-05, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: We examine how the degree of financial market incompleteness affects welfare gains from international cooperation on capital controls. When financial markets are incomplete, international risk sharing is disturbed. However, the optimal global policy significantly reverses the welfare deterioration due to inefficient risk-sharing. We show that when financial markets are more incomplete, the welfare gap between the optimal global policy and the Nash equilibrium increases, and the welfare gains from international cooperation on capital controls then become larger.

Keywords: Financial markets; Incomplete markets; Policy cooperation; Capital controls; Optimal policy; Welfare; Ramsey policy; Open-loop Nash game (search for similar items in EconPapers)
JEL-codes: D52 E61 F32 F38 F42 G15 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2020-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-gth, nep-mac, nep-mon and nep-opm
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