Is Optimal Capital-Control Policy Countercyclical in Open-Economy Models with Collateral Constraints?

29 Pages Posted: 14 Nov 2016

See all articles by Stephanie Schmitt-Grohé

Stephanie Schmitt-Grohé

Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Martín Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: November 2016

Abstract

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. Moreover, in the run-up to a financial crisis optimal capital controls rise as the contraction sets in and reach their highest level at the peak of the crisis. 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.

JEL Classification: E44, F41, G01, H23

Suggested Citation

Schmitt-Grohe, Stephanie and Uribe, Martin, Is Optimal Capital-Control Policy Countercyclical in Open-Economy Models with Collateral Constraints? (November 2016). CEPR Discussion Paper No. DP11619, Available at SSRN: https://ssrn.com/abstract=2869073

Stephanie Schmitt-Grohe (Contact Author)

Centre for Economic Policy Research (CEPR) ( email )

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United Kingdom

National Bureau of Economic Research (NBER)

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Martin Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

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