Capital Controls or Macroprudential Regulation?

No 20805, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We examine the effectiveness of capital controls versus macroprudential regulation in reducing financial fragility in a small open economy model in which there is excessive borrowing because of externalities associated with financial crises and contractionary exchange rate depreciations. We find that both types of instruments play distinct roles: macroprudential regulation reduces the indebtedness of leveraged borrowers whereas capital controls induce more precautionary behavior for the economy as a whole, including for savers. This reduces crisis risk by shoring up aggregate net worth and mitigating the transfer problem that occurs during crises. In advanced countries where the risk of large contractionary depreciations is more limited, the role for capital controls subsides. However, macroprudential regulation remains essential in our model to mitigate booms and busts in asset prices.

JEL-codes: E44 F34 F41 (search for similar items in EconPapers)
Date: 2014-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac, nep-opm and nep-rmg
Note: EFG IFM
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Citations: View citations in EconPapers (11)

Published as Capital Controls or Macroprudential Regulation? , Anton Korinek, Damiano Sandri. in NBER International Seminar on Macroeconomics 2015 , Devereux, Giavazzi, and West. 2016
Published as Korinek, Anton & Sandri, Damiano, 2016. "Capital controls or macroprudential regulation?," Journal of International Economics, Elsevier, vol. 99(S1), pages S27-S42.

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Chapter: Capital Controls or Macroprudential Regulation? (2016)
Journal Article: Capital controls or macroprudential regulation? (2016)
Working Paper: Capital Controls or Macroprudential Regulation? (2015)
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