DP11619 Is Optimal Capital-Control Policy Countercyclical In Open-Economy Models With Collateral Constraints?
|Author(s):||Stephanie Schmitt-Grohé, Martin Uribe|
|Publication Date:||November 2016|
|JEL(s):||E44, F41, G01, H23|
|Programme Areas:||International Macroeconomics and Finance, Monetary Economics and Fluctuations|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=11619|
This paper contributes to a literature that studies optimal capital control policy in open economy models with pecuniary externalities due to flow collateral constraints. It shows that the optimal policy calls for capital controls to be lowered during booms and to be increased during recessions. Moreover, in the run-up to a financial crisis optimal capital controls rise as the contraction sets in and reach their highest level at the peak of the crisis. These findings are at odds with the conventional view that capital controls should be tightened during expansions to curb capital inflows and relaxed during contractions to discourage capital flight.