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Federal Reserve Bank of Dallas
Globalization Institute Working Papers
Capital Controls as Macro-prudential Policy in a Large Open Economy
J. Scott Davis
Michael B. Devereux
Abstract

The literature on optimal capital controls for macro-prudential policy has focused on capital controls in a small open economy. This ignores the spillover effects to the rest of the world. This paper re-examines the case for capital controls in a large open economy, where domestic financial constraints may bind following a large negative shock. There is a tension between the desire to tax inflows to manipulate the terms of trade and tax outflows for macro-prudential purposes. Non-cooperative capital controls are ineffective as macro-prudential policy. Cooperative policy will ignore terms-of-trade manipulation and thus cooperative capital controls yield more effective macro-prudential policy.


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J. Scott Davis & Michael B. Devereux, Capital Controls as Macro-prudential Policy in a Large Open Economy, Federal Reserve Bank of Dallas, Globalization Institute Working Papers 358, 27 Mar 2019.
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Keywords: Capital controls; large open economy; terms-of-trade; macroprudential; crisis management
DOI: 10.24149/gwp358
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