Capital Controls as Macro-Prudential Policy in a Large Open Economy
59 Pages Posted: 22 Apr 2019
Date Written: 2019-03-27
The literature on optimal capital controls for macro-prudential policy has focused on capital controls in a small open economy. This ignores the spillover effects to the rest of the world. This paper re-examines the case for capital controls in a large open economy, where domestic financial constraints may bind following a large negative shock. There is a tension between the desire to tax inflows to manipulate the terms of trade and tax outflows for macro-prudential purposes. Non-cooperative capital controls are ineffective as macro-prudential policy. Cooperative policy will ignore terms-of-trade manipulation and thus cooperative capital controls yield more effective macro-prudential policy.
Keywords: Capital controls, large open economy, terms-of-trade, macroprudential, crisis management
JEL Classification: F40
Suggested Citation: Suggested Citation