Capital Controls with International Reserve Accumulation: Can This Be Optimal?

52 Pages Posted: 23 Nov 2012

See all articles by Philippe Bacchetta

Philippe Bacchetta

University of Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Kenza Benhima

University of Lausanne

Yannick Kalantzis

Banque de France

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2012

Abstract

Motivated by the Chinese experience, we analyze a semi-open economy where the central bank has access to international capital markets, but the private sector has not. This enables the central bank to choose an interest rate different from the international rate. We examine the optimal policy of the central bank by modelling it as a Ramsey planner who can choose the level of domestic public debt and of international reserves. The central bank can improve the saving opportunities of credit-constrained consumers modelled as in Woodford (1990). We find that in a steady state it is optimal for the central bank to replicate the open economy, i.e., to issue debt financed by the accumulation of reserves so that the domestic interest rate equals the foreign rate. When the economy is in transition, however, a rapidly growing economy has a higher welfare without capital mobility and the optimal interest rate differs from the international rate. In the Chinese context, we argue that the domestic interest rate should be temporarily above the international rate, which means that the central bank should accumulate more foreign assets than in an open economy.

Keywords: capital controls, international reserves

JEL Classification: E58, F36, F41

Suggested Citation

Bacchetta, Philippe and Benhima, Kenza and Kalantzis, Yannick, Capital Controls with International Reserve Accumulation: Can This Be Optimal? (November 1, 2012). Banque de France Working Paper No. 406, Available at SSRN: https://ssrn.com/abstract=2179549 or http://dx.doi.org/10.2139/ssrn.2179549

Philippe Bacchetta

University of Lausanne ( email )

Faculty of Business and Economics
Internef 523
1015 Lausanne
Switzerland

HOME PAGE: http://www.hec.unil.ch/pbacchetta/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Kenza Benhima

University of Lausanne ( email )

Quartier Chambronne
Lausanne, Vaud CH-1015
Switzerland

Yannick Kalantzis (Contact Author)

Banque de France ( email )

Paris
France

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