Capital Controls or Real Exchange Rate Policy? A Pecuniary Externality Perspective

33 Pages Posted: 6 Jun 2013

See all articles by Gianluca Benigno

Gianluca Benigno

London School of Economics & Political Science (LSE) - Department of Economics

Huigang Chen

MarketShare Partners

Alessandro Rebucci

Johns Hopkins University - Carey Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Chris Otrok

University of Missouri; Federal Reserve Banks - Federal Reserve Bank of St. Louis

Eric Young

Inter-American Development Bank (IDB)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2013

Abstract

In the aftermath of the global financial crisis, a new policy paradigm has emerged in which old-fashioned policies such as capital controls and other government distortions have become part of the standard policy tool kit (so called macro- prudential policies). On the wave of this seemingly unanimous policy consensus, a new strand of theoretical literature contends that capital controls are welfare enhancing and can be justified rigorously because of second-best considerations. Within the same theoretical framework adopted in this fast-growing literature, this paper shows that a credible commitment to support the exchange rate in crisis times always welfare-dominates prudential capital controls, as it can achieve unconstrained allocation.

JEL Classification: E52, F37, F41

Suggested Citation

Benigno, Gianluca and Chen, Huigang and Rebucci, Alessandro and Otrok, Christopher and Young, Eric, Capital Controls or Real Exchange Rate Policy? A Pecuniary Externality Perspective (March 2013). IDB Working Paper No. IDB-WP-393. Available at SSRN: https://ssrn.com/abstract=2275159 or http://dx.doi.org/10.2139/ssrn.2275159

Gianluca Benigno

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 7807 (Phone)

Huigang Chen

MarketShare Partners ( email )

11150 Santa Monica Boulevard
Los Angeles, CA 90025
United States

Alessandro Rebucci

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

HOME PAGE: http://carey.jhu.edu/faculty-research/faculty-directory/alessandro-rebucci-phd

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Christopher Otrok

University of Missouri ( email )

118 Professional Building
Columbia, MO 65211
United States

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Eric Young

Inter-American Development Bank (IDB)

1300 New York Avenue NW
Washington, DC 20577
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
91
Abstract Views
631
rank
208,930
PlumX Metrics