Federal Reserve Bank of Minneapolis
On the Desirability of Capital Controls
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.
Cite this item
Jonathan Heathcote & Fabrizio Perri, On the Desirability of Capital Controls, Federal Reserve Bank of Minneapolis, Staff Report 523, 15 Jan 2016.
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
Keywords: Capital controls; Terms of trade; International risk sharing
This item with handle RePEc:fip:fedmsr:523
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