On the Desirability of Capital Controls
In a standard two country international macro model we ask whether imposing restrictions on international non-contingent borrowing and lending is ever desirable. The answer is yes. If one country imposes capital controls unilaterally, it can generate favorable changes in the dynamics of equilibrium interest rates and the terms of trade, and thereby benefit at the expense of its trading partner. If both countries simultaneously impose capital controls, the welfare effects are ambiguous. We identify calibrations in which symmetric capital controls improve terms of trade insurance against country specific shocks, and thereby increase welfare for both countries.
We thank Markus Brunnermeier, Mick Devereux, Pierre Olivier Gourinchas, Ayhan Kose, and two anonymous referees for very useful comments. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Jonathan Heathcote & Fabrizio Perri, 2016. "On the Desirability of Capital Controls," IMF Economic Review, vol 64(1), pages 75-102. citation courtesy of