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

43 Pages Posted: 22 Mar 2022

See all articles by Dennis Bonam

Dennis Bonam

De Nederlandsche Bank

Gavin Goy

De Nederlandsche Bank

Emmanuel de Veirman

De Nederlandsche Bank

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Abstract

The literature on the effects of country risk premium shocks has mostly focused on emerging market economies. We show empirically that in developed economies, risk premium shocks explain a non-trivial share of aggregate fluctuations and are key drivers of real activity in particular crises. Both our empirical results and results from a two-country New Keynesian model indicate that an increase in the country risk premium leads to a reduction in aggregate output under monetary union, but not so in countries with flexible exchange rates and independent monetary policy. Model simulations suggest that managing international capital flows enhances welfare in countries under monetary union.

Keywords: country risk premium, capital flow management, Bayesian panel VAR, exchange rate regime, welfare analysis

Suggested Citation

Bonam, Dennis and Goy, Gavin and de Veirman, Emmanuel, Should Developed Economies Manage International Capital Flows? An Empirical and Welfare Analysis. Available at SSRN: https://ssrn.com/abstract=4063487 or http://dx.doi.org/10.2139/ssrn.4063487

Dennis Bonam (Contact Author)

De Nederlandsche Bank ( email )

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Gavin Goy

De Nederlandsche Bank ( email )

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Emmanuel De Veirman

De Nederlandsche Bank ( email )

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