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; Federal Reserve Bank of New York

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
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+44 20 7955 7807 (Phone)

Federal Reserve Bank of New York ( email )

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Huigang Chen

MarketShare Partners ( email )

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Alessandro Rebucci

Johns Hopkins University - Carey Business School ( email )

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

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Christopher Otrok

University of Missouri ( email )

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

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Eric Young

Inter-American Development Bank (IDB)

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United States

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