Capital controls or exchange rate policy? a pecuniary externality perspective
Abstract: In the aftermath of the global nancial crisis, a new policy paradigm has emerged> in which old-fashioned policies such as capital controls and other government distor-> tions have become part of the standard policy toolkit (the so-called macro-prudential> policies). On the wave of this seemingly unanimous policy consensus, a new strand> of theoretical literature contends that capital controls are welfare enhancing and can> be justi ed rigorously because of second-best considerations. Within the same the-> oretical framework adopted in this fast-growing literature, we show that a credible> commitment to support the exchange rate in crisis times always welfare-dominates> prudential capital controls as it can achieve the rst best unconstrained allocation.> In this benchmark economy, prudential capital controls are optimal only when the set> of policy tools is restricted so that they are the only policy instrument available.
File(s): File format is application/pdf http://research.stlouisfed.org/wp/2012/2012-025.pdf
Provider: Federal Reserve Bank of St. Louis
Part of Series: Working Papers
Publication Date: 2012