Capital Controls or Macroprudential Regulation?

36 Pages Posted: 11 Nov 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

Multiple version iconThere are 2 versions of this paper

Date Written: October 2015

Abstract

International capital flows can create significant financial instability in emerging economies because of pecuniary externalities associated with exchange rate movements. Does this make it optimal to impose capital controls or should policymakers rely on domestic macroprudential regulation? This paper presents a tractable model to show that it is desirable to employ both types of instruments: Macroprudential regulation reduces overborrowing, while capital controls increase the aggregate net worth of the economy as a whole by also stimulating savings. The two policy measures should be set higher the greater an economy's debt burden and the higher domestic inequality. In our baseline calibration based on the East Asian crisis countries, we find optimal capital controls and macroprudential regulation in the magnitude of 2 percent. In advanced countries where the risk of sharp exchange rate depreciations is more limited, the role for capital controls subsides. However, macroprudential regulation remains essential to mitigate booms and busts in asset prices.

Keywords: pecuniary externalities, macroprudential regulation, inequality, exchange rate, exchange, lenders, borrowers, markets, International Lending and Debt Problems, Open Economy Macroeconomics, Financial Markets and the Macroeconomy, inequality.,

JEL Classification: -;- F34, F41, E44

Suggested Citation

Korinek, Anton and Sandri, Damiano, Capital Controls or Macroprudential Regulation? (October 2015). IMF Working Paper No. 15/218. Available at SSRN: https://ssrn.com/abstract=2689031

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
United States

Damiano Sandri

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

700 19th Street NW
Washington, DC 20431
United States

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