NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Optimal Capital Controls and Real Exchange Rate Policies: A Pecuniary Externality Perspective

Gianluca Benigno, Huigang Chen, Christopher Otrok, Alessandro Rebucci, Eric R. Young

NBER Working Paper No. 22224
Issued in May 2016
NBER Program(s):EFG, IFM, ME

A new theoretical literature studies the use of capital controls to prevent financial crises in models in which pecuniary externalities justify government intervention. Within the same theoretical framework, we show that when ex-post policies such as defending the exchange rate can contain or resolve financial crises, there is no need to intervene ex-ante with capital controls. On the other hand, if crises management policies entail some efficiency costs, then crises prevention policies become part of the optimal policy mix. In the standard model economy used in the literature with costly crisis management policies, the optimal policy mix combines capital controls in tranquil times with support for the real exchange rate to limit its depreciation during crises times. The optimal policy mix yields more borrowing and consumption, a lower probability of financial crisis, and twice as large welfare gains than in the socially planned equilibrium with capital controls alone.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Access to NBER Papers

You are eligible for a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.

E-mail:

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w22224

Published: Gianluca Benigno & Huigang Chen & Christopher Otrok & Alessandro Rebucci & Eric R. Young, 2016. "Optimal Capital Controls and Real Exchange Rate Policies: A Pecuniary Externality Perspective," Journal of Monetary Economics, . citation courtesy of

Users who downloaded this paper also downloaded* these:
Farhi and Maggiori w22295 A Model of the International Monetary System
Pinkovskiy and Sala-i-Martin w22216 Newer Need Not be Better: Evaluating the Penn World Tables and the World Development Indicators Using Nighttime Lights
Rey w21852 International Channels of Transmission of Monetary Policy and the Mundellian Trilemma
Mian and Sufi w22256 Who Bears the Cost of Recessions? The Role of House Prices and Household Debt
Gorton w22210 The History and Economics of Safe Assets
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us