Cookies?
Library Header Image
LSE Research Online LSE Library Services

Optimal capital controls and real exchange rate policies: A pecuniary externality perspective

Benigno, Gianluca, Chen, Huigang, Otrok, Christopher, Rebucci, Alessandro and Young, Eric R. (2015) Optimal capital controls and real exchange rate policies: A pecuniary externality perspective. CFM discussion paper series (CFM-DP2015-12). Centre For Macroeconomics, London, UK.

[img]
Preview
Text - Published Version
Download (421kB) | Preview

Abstract

In response to the global Önancial crisis a new policy paradigm emerged in which capital controls and other quantitative restrictions on credit áows have become part of the standard crisis prevention policy toolkit. A new strand of theoretical literature studies the use of capital controls in a context in which pecuniary externality justiÖes policy interventions. Within the same theoretical framework adopted in this literature, we show that the optimal design of crisis prevention (ex-ante) policies depends on the e§ectiviness of crisis management (ex-post) policies. This interaction between ex-ante and ex-post policies gives rise to a new rationale for the use of capital controls. SpeciÖcally, we show that when ex-post policies are e§ective in containing crises, there is no need to intervene ex-ante with capital controls. On the other hand, if crises management policies entail e¢ ciency costs and hence lose e§ectiveness, then the optimal policy mix consists of both ex-ante and ex-post interventions so that crises prevention policies become desirable. In our model, the optimal policy mix combines capital controls in tranquil times with real exchange rate support to limit its depreciation during crises times and yields welfare gains of more than 1% in consumption equivalence terms.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.centreformacroeconomics.ac.uk/Home.aspx
Additional Information: © 2015 The Authors
Divisions: Centre for Macroeconomics
Subjects: H Social Sciences > HB Economic Theory
JEL classification: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects)
F - International Economics > F3 - International Finance > F37 - International Finance Forecasting and Simulation
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
Sets: Research centres and groups > Centre for Macroeconomics
Date Deposited: 14 Dec 2017 11:28
Last Modified: 03 Sep 2019 23:30
URI: http://eprints.lse.ac.uk/id/eprint/86312

Actions (login required)

View Item View Item

Downloads

Downloads per month over past year

View more statistics