Discussion Paper Details

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Title: On the Desirability of Capital Controls

Author(s): Jonathan Heathcote and Fabrizio Perri

Publication Date: January 2016

Keyword(s): capital controls, international risk sharing and terms of trade

Programme Area(s): International Macroeconomics and Finance

Abstract: In a standard two-country international macro model, we ask whether imposing restrictions on international non contingent borrowing and lending is ever desirable. The answer is yes. If one country imposes capital controls unilaterally, it can generate favorable changes in the dynamics of equilibrium interest rates and the terms of trade, and thereby benefit at the expense of its trading partner. If both countries simultaneously impose capital controls, the welfare effects are ambiguous. We identify calibrations in which symmetric capital controls improve terms of trade insurance against country-specific shocks and thereby increase welfare for both countries.

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Bibliographic Reference

Heathcote, J and Perri, F. 2016. 'On the Desirability of Capital Controls'. London, Centre for Economic Policy Research.