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The Prudential Use of Capital Controls and Foreign Currency Reserves

Javier Bianchi and Guido Lorenzoni

No 29476, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We provide a simple framework to study the prudential use of capital controls and currency reserves that have been explored in the recent literature. We cover the role of both pecuniary externalities and aggregate demand externalities. The model features a central policy dilemma for emerging economies facing large capital outflows: the choice between increasing the policy rate to stabilize the exchange rate and decreasing the policy rate to stabilize employment. Ex ante capital controls and reserve accumulation can help mitigate this dilemma. We use our framework to survey the recent literature and provide an overview of recent empirical findings on the use of these policies.

JEL-codes: F32 F33 F41 F42 G18 (search for similar items in EconPapers)
Date: 2021-11
New Economics Papers: this item is included in nep-cba, nep-mon and nep-opm
Note: IFM ME
References: Add references at CitEc
Citations: View citations in EconPapers (14)

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