Capital Controls Spillovers

Abstract

I built a three-country business cycle model with one AE and two EMEs to analyze the spillover effects arising from capital controls. I find that, following a push-factor shock from the AE, if one EME tightens capital controls, the other EME experiences an additional wave of foreign investments. In addition, the spillover effects are economically meaningful and can be sizable under specific conditions. Moreover, my findings point out that, in the presence of international financial frictions, moderate capital controls may be useful to EMEs to affect the interest rate at which they trade international bonds. Finally, based on my results, coordination among EMEs in setting capital controls seems to deliver relatively small welfare gains compared with the Nash equilibrium.

Keywords: capital controls, open economy macroeconomics, international business cycles

JEL Classification: F38, F41, F44