On the desirability of capital controls

By Fabrizio Perri and Jonathan Heathcote

http://d.repec.org/n?u=RePEc:red:sed015:1349&r=dge

In a standard two country international macro model we ask whether shutting down the market for international non-contingent borrowing and lending is ever desirable. The answer is yes. Imposing capital controls is unilaterally desirable when initial conditions are such that ruling out bond trade generates a sufficiently favorable change in the expected path for the terms of trade. Imposing capital controls can be welfare improving for both countries for calibrations in which changes in equilibrium terms of trade movements induced by the controls improve insurance against country specific shocks.

Nice paper that goes against general intuition that capital controls are always bad. It is remarkable that the model can show that they can be beneficial to both countries under some conditions. And those conditions are likely broader than what the authors indicate, as this type of model typically understates the volatility of the terms of trade.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: