A Theory of Capital Controls as Dynamic Terms-of-Trade Manipulation

Arnaud Costinot, Guido Lorenzoni () and Iván Werning

No 17680, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper develops a simple theory of capital controls as dynamic terms-of-trade manipulation. We study an infinite horizon endowment economy with two countries. One country chooses taxes on international capital flows in order to maximize the welfare of its representative agent, while the other country is passive. We show that capital controls are not guided by the absolute desire to alter the intertemporal price of the goods produced in any given period, but rather by the relative strength of this desire between two consecutive periods. Specifically, it is optimal for the strategic country to tax capital inflows (or subsidize capital outflows) if it grows faster than the rest of the world and to tax capital outflows (or subsidize capital inflows) if it grows more slowly. In the long-run, if relative endowments converge to a steady state, taxes on international capital flows converge to zero. Although our theory emphasizes interest rate manipulation, the country's net financial position per se is irrelevant.

JEL-codes: F13 F32 F33 (search for similar items in EconPapers)
Date: 2011-12
New Economics Papers: this item is included in nep-dge and nep-opm
Note: IFM ITI
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Citations: View citations in EconPapers (41)

Published as Arnaud Costinot & Guido Lorenzoni & Iv�n Werning, 2014. "A Theory of Capital Controls as Dynamic Terms-of-Trade Manipulation," Journal of Political Economy, University of Chicago Press, vol. 122(1), pages 77 - 128.

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