Optimal Bank Reserve Remuneration and Capital Control Policy

40 Pages Posted: 15 Nov 2021 Last revised: 14 Jul 2022

See all articles by Chun-Che Chi

Chun-Che Chi

Institute of Economics, Academia Sinica

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)

Date Written: November 2021

Abstract

A central prediction of open economy models with a pecuniary externality due to a collateral constraint is that the unregulated economy overborrows relative to what occurs under optimal policy. A maintained assumption in this literature is that households borrow directly from foreign lenders. This paper shows that if foreign lending is intermediated by domestic banks and the government has access to capital controls and interest on bank reserves, the unregulated economy underborrows. The optimal bank reserve policy is countercyclical. By increasing bank reserves during contractions, the government acts as a lender of last resort to collateral-constrained households.

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Suggested Citation

Chi, Chun-Che and Schmitt-Grohe, Stephanie and Uribe, Martin, Optimal Bank Reserve Remuneration and Capital Control Policy (November 2021). NBER Working Paper No. w29473, Available at SSRN: https://ssrn.com/abstract=3963701

Chun-Che Chi (Contact Author)

Institute of Economics, Academia Sinica ( email )

128 Academia Road, Section 2
Nankang
Taipei, 11529
Taiwan

Stephanie Schmitt-Grohe

Centre for Economic Policy Research (CEPR) ( email )

London
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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