Capital Controls as Macro-Prudential Policy in a Large Open Economy

59 Pages Posted: 22 Apr 2019 Last revised: 29 Apr 2020

See all articles by Scott Davis

Scott Davis

Federal Reserve Banks - Federal Reserve Bank of Dallas

Michael Devereux

Schroders Investment Management

Multiple version iconThere are 2 versions of this paper

Date Written: March, 2019

Abstract

The literature on optimal capital controls for macro-prudential policy has focused on capital controls in a small open economy. This ignores the spillover effects to the rest of the world. This paper re-examines the case for capital controls in a large open economy, where domestic financial constraints may bind following a large negative shock. There is a tension between the desire to tax inflows to manipulate the terms of trade and tax outflows for macro-prudential purposes. Non-cooperative capital controls are ineffective as macro-prudential policy. Cooperative policy will ignore terms-of-trade manipulation and thus cooperative capital controls yield more effective macro-prudential policy.

Keywords: Capital controls, large open economy, terms of trade, macroprudential, crisis management

JEL Classification: F40

Suggested Citation

Davis, Scott and Devereux, Michael, Capital Controls as Macro-Prudential Policy in a Large Open Economy (March, 2019). Globalization Institute Working Paper No. 358, Available at SSRN: https://ssrn.com/abstract=3375171 or http://dx.doi.org/10.24149/gwp358

Scott Davis (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Michael Devereux

Schroders Investment Management ( email )

31 Gresham Street
London, EC2V 7QA
United Kingdom

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