Capital Controls with International Reserve Accumulation: Can this Be Optimal ?

Philippe Bacchetta, Kenza Benhima and Yannick Kalantzis

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: Motivated by the Chinese experience, we analyze a semi-open economy where the central bank has access to international capital markets, but the private sector has not. This enables the central bank to choose an interest rate different from the international rate. We examine the optimal policy of the central bank by modelling it as a Ramsey planner who can choose the level of domestic public debt and of international reserves. The central bank can improve savings opportunities of credit-constrained consumers modelled as in Woodford (1990). We find that in a steady state it is optimal for the central bank to replicate the open economy, i.e., to issue debt financed by the accumulation of reserves so that the domestic interest rate equals the foreign rate. When the economy is in transition, however, a rapidly growing economy has a higher welfare without capital mobility and the optimal interest rate differs from the international rate. We argue that the domestic interest rate should be temporarily above the international rate. We also find that capital controls can still help reach the first best when the planner has more fiscal instruments.

Keywords: reserve accumulation; capital controls; Ramsey planner; credit constraints (search for similar items in EconPapers)
JEL-codes: E58 F36 F41 (search for similar items in EconPapers)
Pages: 40 pp. + figures
Date: 2011-12
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ifn, nep-mac, nep-mon and nep-tra
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Citations: View citations in EconPapers (10)

Published in American Economic Journal, Macroeconomics 5(3), July 2013, pp. 229-262

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Related works:
Journal Article: Capital Controls with International Reserve Accumulation: Can This Be Optimal? (2013)
Working Paper: Capital Controls with International Reserve Accumulation: Can this Be Optimal? (2012)
Working Paper: Capital Controls with International Reserve Accumulation: Can this Be Optimal? (2012)
Working Paper: Capital Controls with International Reserve Accumulation: Can this Be Optimal? (2012)
Working Paper: Capital Controls with International Reserve Accumulation: Can this Be Optimal? (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:lau:crdeep:11.08

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