Capital Controls or Real Exchange Rate Policy?: A Pecuniary Externality Perspective

In the aftermath of the global financial crisis, a new policy paradigm has emerged in which old-fashioned policies such as capital controls and other government distortions have become part of the standard policy tool kit (so called macro- prudential policies). On the wave of this seemingly unanimous policy consensus, a new strand of theoretical literature contends that capital controls are welfare enhancing and can be justified rigorously because of second-best considerations. Within the same theoretical framework adopted in this fast-growing literature, this paper shows that a credible commitment to support the exchange rate in crisis times always welfare-dominates prudential capital controls, as it can achieve unconstrained allocation.

Bibliographic Details

Main Author:	Inter-American Development Bank
Other Authors:	Gianluca Benigno
Format:	Working Papers biblioteca
Language:	English
Published:	Inter-American Development Bank
Subjects:	Financial Sector, E52 - Monetary Policy, F37 - International Finance Forecasting and Simulation: Models and Applications, F41 - Open Economy Macroeconomics, IDB-WP-393,
Online Access:	http://dx.doi.org/10.18235/0011453 https://publications.iadb.org/en/capital-controls-or-real-exchange-rate-policy-pecuniary-externality-perspective
Tags:	Add Tag No Tags, Be the first to tag this record!