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Federal Reserve Bank of Minneapolis
Staff Report
On the Desirability of Capital Controls
Jonathan Heathcote
Fabrizio Perri

In a standard two-country international macro model, we ask whether imposing restrictions on international non contingent borrowing and lending is ever desirable. The answer is yes. If one country imposes capital controls unilaterally, it can generate favorable changes in the dynamics of equilibrium interest rates and the terms of trade, and thereby benefit at the expense of its trading partner. If both countries simultaneously impose capital controls, the welfare effects are ambiguous. We identify calibrations in which symmetric capital controls improve terms of trade insurance against country-specific shocks and thereby increase welfare for both countries.

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Jonathan Heathcote & Fabrizio Perri, On the Desirability of Capital Controls, Federal Reserve Bank of Minneapolis, Staff Report 523, 15 Jan 2016.
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Keywords: Capital controls; Terms of trade; International risk sharing
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