Is Optimal Capital-Control Policy Countercyclical in Open-Economy Models with Collateral Constraints?
34 Pages Posted: 8 Aug 2016
Date Written: August 2016
This paper contributes to a literature that studies optimal capital control policy in open economy models with pecuniary externalities due to flow collateral constraints. It shows that the optimal policy calls for capital controls to be lowered during booms and to be increased during recessions. These findings are at odds with the conventional view that capital controls should be tightened during expansions to curb capital inflows and relaxed during contractions to discourage capital flight.
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