Capital Controls: A Survey of the New Literature

36 Pages Posted: 17 Dec 2019

See all articles by Alessandro Rebucci

Alessandro Rebucci

Johns Hopkins University - Carey Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Chang Ma

Fudan University - Fanhai International School of Finance (FISF)

Multiple version iconThere are 3 versions of this paper

Date Written: November 30, 2019

Abstract

This paper reviews selected post-Global Financial Crisis theoretical and empirical contributions on capital controls and identifies three theoretical motives for the use of capital controls: pecuniary externalities in models of financial crises, aggregate demand externalities in new-Keynesian models of the business cycle, and terms of trade manipulation in open economy models with pricing power. Pecuniary and demand externalities offer the most compelling case for the adoption of capital controls, but macroprudential policy can also address the same distortions. So capital controls generally are not the only instrument that can do the job. If evaluated through the lenses of the new theories, the empirical evidence reviewed suggests that capital controls can have the intended effects, even though the extant literature is inconclusive as to whether the effects documented amount to a net gain or loss in welfare terms. Terms of trade manipulation also provides a clear cut theoretical case for the use of capital controls, but this motive is less compelling because of the spillover and coordination issues inherent with the use of control on capital flows for this purpose. Perhaps not surprisingly, only a handful of countries have used capital controls in a countercyclical manner, while many adopted macroprudential policies. This suggests that capital control policy might entail additional costs other than increased financing costs, such as signaling the bad quality of future policies, leakages, and spillovers.

Keywords: Business Cycles, Capital Controls, Capital Flows, Financial Crises, Monetary and Exchange Rate Policy, Macroprudential Policy, Pecuniary and Demand Externalities, Terms of Trade Manipulation

JEL Classification: F38, F41

Suggested Citation

Rebucci, Alessandro and Ma, Chang, Capital Controls: A Survey of the New Literature (November 30, 2019). Available at SSRN: https://ssrn.com/abstract=3495987 or http://dx.doi.org/10.2139/ssrn.3495987

Alessandro Rebucci (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

HOME PAGE: http://carey.jhu.edu/faculty-research/faculty-directory/alessandro-rebucci-phd

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Chang Ma

Fudan University - Fanhai International School of Finance (FISF) ( email )

China

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