Capital controls or exchange rate policy? a pecuniary externality perspective (2012).

Content Provider	CiteSeerX
Author	Benigno, Gianluca Chen, Huigang Otrok, Christopher Rebucci, Ro
Abstract	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 toolkit (the 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 secondbest considerations. Within the same theoretical framework adopted in this fast-growing literature, we show that a credible commitment to support the exchange rate in crisis times always welfare-dominates prudential capital controls as it can achieve the first best unconstrained allocation. In this benchmark economy, prudential capital controls are optimal only when the set of policy tools is restricted so that they are the only policy instrument available.
File Format	PDF
Publisher Date	2012-01-01
Access Restriction	Open
Subject Keyword	Capital Control Pecuniary Externality Perspective Exchange Rate Policy Prudential Capital Control Government Distortion Secondbest Consideration Theoretical Literature Unconstrained Allocation Benchmark Economy So-called Macro-prudential Policy New Policy Paradigm Old-fashioned Policy Policy Tool New Strand Standard Policy Toolkit Policy Instrument Crisis Time Global Financial Crisis Welfare-dominates Prudential Capital Control Fast-growing Literature Exchange Rate Theoretical Framework Credible Commitment Unanimous Policy Consensus
Content Type	Text