Capital Controls, Competitive Depreciation, and the Technological Frontier

Abstract

This paper considers the internal and external welfare effects of international capital controls and real exchange rate undervaluation in a multi-country setting. I present a dynamic open-economy macro model with an endogenously determined rate of interest on internationally-traded assets. All countries produce tradable and nontradable goods using technology that converges over time to a global frontier. The model quantifies the welfare effects of the unilateral implementation of capital controls that depreciate the real exchange rate in economies both already at and converging to the technological frontier. For developing economies, I demonstrate that such government interventions may constitute "beggar-thy-neighbor" policies.

Keywords: International Reserves, Capital Controls, Mercantilism, Economic Growth, Real Exchange Rates, Externalities

JEL Classification: F34, F38, F43, H23, O40