The New Economics of Capital Controls Imposed for Prudential Reasons+L4888
IMF Working Papers, December 1, 2011
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Bibliographic details
- Authors: Anton Korinek
- Published: December 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781463927844.001
Overview and central argument
- This paper provides an introduction to the new economics of prudential capital controls in emerging economies.
- The literature is based on the notion that there are externalities associated with financial crises because individual market participants do not internalize their contribution to aggregate financial instability when they make their financing decisions.
- As a result, private financing decisions of individuals are distorted towards excessive risk-taking and they impose externalities in the form of greater financial instability on each other.
- Prudential capital controls can induce private agents to internalize these externalities and thereby increase macroeconomic stability and enhance welfare.
Key findings and analytical themes
- Externalities and pecuniary externalities: The paper emphasizes pecuniary externalities arising from price movements and balance sheet effects that amplify systemic risk.
- Distortion of private incentives: Individual market participants fail to account for their contribution to aggregate instability, leading to excessive risk-taking.
- Role of prudential capital controls: Such controls can be used to correct private incentives by internalizing external costs, improving macroeconomic stability, and enhancing welfare.
- Scope: The discussion focuses on emerging economies and links capital controls to asset prices, balance of payments, exchange rates, financial crises, and public financial management.
Policy implications and recommendations
- Use prudential capital controls as a tool to address pecuniary externalities and systemic risk in emerging economies.
- Design capital controls to align private financing incentives with social welfare by accounting for balance sheet effects and price movements.
- Consider the interaction between capital controls and other macroprudential policies to enhance their effectiveness in reducing excessive short-term debt and foreign-currency exposure.
Subjects and keywords
- Subject: Asset prices, Balance of payments, Capital controls, Exchange rates, Financial crises, Financial statements, Foreign exchange, Prices, Public financial management (PFM)
- Keywords: Asset prices, balance sheet effects, capital controls, Exchange rates, financial crises, Financial statements, foreign currency, Global, long-term debt, Pareto efficiency, pecuniary externalities, pecuniary externality, price movement, short-term debt, WP
Source: IMF Working Papers — "The New Economics of Capital Controls Imposed for Prudential Reasons+L4888" by Anton Korinek, December 1, 2011.