Capital Controls or Macroprudential Regulation?

October 1, 2015

Preview Citation

Format: Chicago

Anton Korinek, and Damiano Sandri. Capital Controls or Macroprudential Regulation?, (USA: International Monetary Fund, 2015) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

International capital flows can create significant financial instability in emerging economies because of pecuniary externalities associated with exchange rate movements. Does this make it optimal to impose capital controls or should policymakers rely on domestic macroprudential regulation? This paper presents a tractable model to show that it is desirable to employ both types of instruments: Macroprudential regulation reduces overborrowing, while capital controls increase the aggregate net worth of the economy as a whole by also stimulating savings. The two policy measures should be set higher the greater an economy's debt burden and the higher domestic inequality. In our baseline calibration based on the East Asian crisis countries, we find optimal capital controls and macroprudential regulation in the magnitude of 2 percent. In advanced countries where the risk of sharp exchange rate depreciations is more limited, the role for capital controls subsides. However, macroprudential regulation remains essential to mitigate booms and busts in asset prices.

Subject: Asset prices, Balance of payments, Capital controls, Consumption, Exchange rates, Foreign exchange, National accounts, Prices, Real exchange rates

Keywords: Asset price externality, Asset prices, Asset purchase, Capital controls, Consumption, Covariance term, East Asia, Exchange rate, Exchange rate depreciation, Exchange rate effect, Exchange rate fluctuation, Exchange rates, Financial stability, Inequality, Macroprudential regulation, Marginal utility, Pecuniary externalities, Price change, Real exchange rates, Resource constraint, Simplifying terms, Wedge terms, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/218
Stock No:

WPIEA2015218
ISBN:

9781513506463
ISSN:

1018-5941

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