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Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
Capital Controls and Monetary Policy Autonomy in a Small Open Economy
J. Scott Davis
Ignacio Presno
Abstract

Is there a link between capital controls and monetary policy autonomy in a country with a floating currency? Shocks to capital flows into a small open economy lead to volatility in asset prices and credit supply. To lessen the impact of capital flows on financial instability, a central bank finds it optimal to use the domestic interest rate to "manage" the capital account. Capital account restrictions affect the behavior of optimal monetary policy following shocks to the foreign interest rate. Capital controls allow optimal monetary policy to focus less on the foreign interest rate and more on domestic variables.


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J. Scott Davis & Ignacio Presno, Capital Controls and Monetary Policy Autonomy in a Small Open Economy, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 1190, Feb 2017.
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Keywords: Capital controls ; Credit constraints ; Small open economy
DOI: 10.17016/IFDP.2017.1190
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