Capital Controls or Macroprudential Regulation?

28 Pages Posted: 5 Jan 2015

See all articles by Anton Korinek

Anton Korinek

University of Virginia - Department of Economics and Darden School of Business; National Bureau of Economic Research (NBER)

Damiano Sandri

International Monetary Fund (IMF) - Research Department

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Date Written: December 2014

Abstract

We examine the effectiveness of capital controls versus macroprudential regulation in reducing financial fragility in a small open economy model in which there is excessive borrowing because of externalities associated with financial crises and contractionary exchange rate depreciations. We find that both types of instruments play distinct roles: macroprudential regulation reduces the indebtedness of leveraged borrowers whereas capital controls induce more precautionary behavior for the economy as a whole, including for savers. This reduces crisis risk by shoring up aggregate net worth and mitigating the transfer problem that occurs during crises. In advanced countries where the risk of large contractionary depreciations is more limited, the role for capital controls subsides. However, macroprudential regulation remains essential in our model to mitigate booms and busts in asset prices.

Suggested Citation

Korinek, Anton and Sandri, Damiano, Capital Controls or Macroprudential Regulation? (December 2014). NBER Working Paper No. w20805. Available at SSRN: https://ssrn.com/abstract=2545183

Anton Korinek (Contact Author)

University of Virginia - Department of Economics and Darden School of Business ( email )

248 McCormick Rd
Charlottesville, VA 22904
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Damiano Sandri

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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