Should Developed Economies Manage International Capital Flows? An Empirical and Welfare Analysis

49 Pages Posted: 5 Jan 2021

See all articles by Dennis Bonam

Dennis Bonam

De Nederlandsche Bank

Gavin Goy

De Nederlandsche Bank

Emmanuel de Veirman

De Nederlandsche Bank

Multiple version iconThere are 2 versions of this paper

Date Written: December 19, 2020

Abstract

At least since the euro area sovereign debt crisis, it is evident that country risk premium shocks have adverse economic effects, not only in emerging economies, but advanced economies as well. Using a Bayesian Panel Vector Autoregression model, we find that increases in the risk premium lower output under monetary union, yet not in countries with flexible exchange rates and independent monetary policies. We study the transmission mechanism in a two-country New Keynesian model and show that capital controls substantially attenuate the effects of risk premium shocks. However, the welfare gain of imposing capital controls hinges on the nature of the shock and the prevailing exchange rate regime.

Keywords: Bayesian panel VAR, capital controls, exchange rate regime, welfare

JEL Classification: F32, F38, F41, F45

Suggested Citation

Bonam, Dennis and Goy, Gavin and de Veirman, Emmanuel, Should Developed Economies Manage International Capital Flows? An Empirical and Welfare Analysis (December 19, 2020). De Nederlandsche Bank Working Paper No. 702, Available at SSRN: https://ssrn.com/abstract=3760341 or http://dx.doi.org/10.2139/ssrn.3760341

Dennis Bonam (Contact Author)

De Nederlandsche Bank ( email )

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Gavin Goy

De Nederlandsche Bank ( email )

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HOME PAGE: http://https://www.dnb.nl

Emmanuel De Veirman

De Nederlandsche Bank ( email )

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1000 AB Amsterdam
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