Capital Controls: A Survey of the New Literature

39 Pages Posted: 17 Dec 2019

See all articles by Chang Ma

Chang Ma

Fudan University

Alessandro Rebucci

Johns Hopkins University - Carey Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: December 2019

Abstract

This paper reviews selected post-Global Financial Crisis theoretical and empirical contributions on capital controls and identifies three theoretical motives for the use of this policy tools: pecuniary externalities in models of financial crises, aggregate demand externalities in new-Keynesian models of the business cycle, and terms of trade manipulation in open economy models with pricing power. Pecuniary and demand externalities offer the most compelling case for the adoption of capital controls, but macroprudential policy can also address the same distortion. So, in general, capital controls are not the only instrument that can do the job. If evaluated through the lenses of the new theories, the empirical evidence reviewed suggests that capital controls can have the intended effects, even though the extant literature is inconclusive as to whether the effects documented amount to net gain or losses for the economies that adopted these policies. Terms of trade manipulation also provides a clear cut theoretical case for the use of capital controls, but this motive is less compelling because of the spillover and coordination issues inherent with the use of control on capital flows for this purpose.

Keywords: capital controls, Capital Flows, financial crises, Pecuniary and Demand Externalities, Terms of Trade Manipulation

JEL Classification: F38, F41

Suggested Citation

Ma, Chang and Rebucci, Alessandro, Capital Controls: A Survey of the New Literature (December 2019). CEPR Discussion Paper No. DP14186, Available at SSRN: https://ssrn.com/abstract=3504616

Chang Ma (Contact Author)

Fudan University ( email )

Beijing West District Baiyun Load 10th
Shanghai, 100045
China

Alessandro Rebucci

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

HOME PAGE: http://carey.jhu.edu/faculty-research/faculty-directory/alessandro-rebucci-phd

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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