Search Results
Working Paper
Capital Controls and the Global Financial Cycle
Capital flows into emerging markets are volatile and associated with risks. A common prescription is to impose counter-cyclical capital controls that tighten during economic booms to mitigate future sudden-stop dynamics, but it has been challenging to document such patterns in the data. Instead, we show that emerging markets tighten their capital controls in response to volatility in international financial markets and elevated risk aversion. We develop a model in which this behavior arises from a desire to manipulate the risk premium. When investors are more risk-averse or markets are ...
Working Paper
The Impact of Bretton Woods International Capital Controls on the Global Economy and the Value of Geopolitical Stability: A General Equilibrium Analysis
This paper quantifies the positive and normative impacts of Bretton Woods capital controls on global economic activity. It applies a three-region DSGE model consisting of the U.S., Western Europe, and the Rest of the World (ROW) to measure de facto capital controls and analyze their effects. Counterfactual analyses show Bretton Woods controls significantly prevented ROW capital from flowing to the U.S., had large negative welfare effects on the U.S., raised welfare in the ROW, and increased global output. Why did the U.S. support controls, given lower welfare? By keeping capital in the ROW, ...
Working Paper
The Effect of the China Connect
We document the effect on Chinese firms of the Shanghai (Shenzhen)-Hong Kong Stock Connect. The Connect was an important capital account liberalization introduced in the mid-2010s. It created a channel for cross-border equity investments into a selected set of Chinese stocks while China's overall capital controls policy remained in place. Using a difference-in-difference approach, and with careful attention to sample selection issues, we find that mainland Chinese firm-level investment is negatively affected by contractionary U.S. monetary policy shocks and that firms in the Connect are more ...
Report
Capital controls: a normative analysis
Countries' concerns about the value of their currency have been studied and documented extensively in the literature. Capital controls can be?and often are?used as a tool to manage exchange rate fluctuations. This paper investigates whether countries can benefit from using such a tool. We develop a welfare-based analysis of whether (or, in fact, how) countries should tax international borrowing. Our results suggest that restricting international capital flows through the use of these taxes can be beneficial for individual countries, although it would limit cross-border pooling of risk. The ...
Conference Paper
Capital controls: a normative analysis
Countries' concerns with the value of their currency have been extensively studied and documented in the literature. Capital controls can be (and often are) used as a tool to manage exchange rate fluctuations. This paper investigates whether countries can benefi t from using such a tool. We develop a welfare based analysis of whether (or, in fact, how)countries should tax international borrowing. Our results suggest that managing exchange rate movements with the use of these taxes can be benefi cial for individual countries although it would limit cross-border pooling of risk. This is because ...
Working Paper
Financial market reactions to the Russian invasion of Ukraine
This article analyzes financial market reactions to the Russia-Ukraine war with a focus on the opening weeks. Markets did not completely anticipate the war and asset price reactions strengthened from the first week—when there were hopes for a quick resolution—to the second week, when prices generally peaked and began to partially revert to pre-war values. Exposure to commodity trade and trade with Russia-Ukraine determined market perceptions of the riskiness of equity and foreign exchange assets. Credit default swap prices on sovereign debt and breakeven inflation rates indicate that ...
Discussion Paper
Insider Networks
Modern-day financial systems are highly complex, with billions of exchanges in information, assets, and funds between individuals and institutions. Though daunting to operationalize, regulating these transmissions may be desirable in some instances. For example, securities regulators aim to protect investors by tracking and punishing insider trading. Recent evidence shows that insiders have formed sophisticated networksthat enable them to pursue activities outside the purview of regulatory oversight. In understanding the cat-and-mouse game between regulators and insiders, a key consideration ...
Working Paper
The Impact of Bretton Woods International Capital Controls on the Global Economy and the Value of Geopolitical Stability: A General Equilibrium Analysis
This paper quantifies the positive and normative effects of Bretton Woods capital controls on global economic activity. It applies a three-region DSGE model of the U.S., Western Europe, and the Rest of the World (ROW) that measures capital controls using observed regional consumption growth differences. We find sizable controls during Bretton Woods that prevented ROW capital from flowing to the U.S., and which reduced U.S. welfare and raised ROW welfare. By preventing capital flight in developing economies, we find that Bretton Woods controls promoted the U.S. foreign policy objective of ...
Report
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 ...
Working Paper
Optimal Capital Account Liberalization in China
China maintains tight controls over its capital account. Its current policy regime also features financial repression, under which banks are required to extend funds to state-owned enterprises (SOEs) at favorable terms, despite their lower productivity than private firms on average. We incorporate these features into a general equilibrium model. Our model illustrates a tradeoff between aggregate productivity and inter-temporal allocative efficiency from capital account liberalization under financial repression. As a result, along a transition path with a declining SOE share, ...