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Capital Controls, Monetary Policy, and Balance Sheets in a Small Open Economy

Author

Listed:
  • Shigeto Kitano

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

  • Kenya Takaku

    (Faculty of International Studies, Hiroshima City University, Japan)

Abstract
We develop a small open economy, New Keynesian model that incorporates a financial accelerator in combination with liability dollarization. Applying a Ramsey-type analysis, we compare the welfare implications of an optimal monetary policy under flexible exchange rates and an optimal capital control policy under fixed exchange rates. In an economy without the financial accelerator, an optimal monetary policy under flexible exchange rates is superior to an optimal capital control policy under fixed exchange rates. In contrast, in an economy with the financial accelerator, an optimal capital control under fixed exchange rates yields higher welfare than an optimal monetary policy underflexible exchange rates.

Suggested Citation

  • Shigeto Kitano & Kenya Takaku, 2015. "Capital Controls, Monetary Policy, and Balance Sheets in a Small Open Economy," Discussion Paper Series DP2015-10, Research Institute for Economics & Business Administration, Kobe University, revised Oct 2017.
    • Handle: RePEc:kob:dpaper:dp2015-10
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Hory, Marie-Pierre & Levieuge, Grégory & Onori, Daria, 2023. "The fiscal multiplier when debt is denominated in foreign currency," International Economics, Elsevier, vol. 176(C).
    2. Kitano Shigeto & Takaku Kenya, 2018. "Capital controls as a credit policy tool in a small open economy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 18(1), pages 1-19, January.
    3. Kitano, Shigeto & Zhou, Yang, 2022. "Effects of China’s capital controls on individual asset categories," Finance Research Letters, Elsevier, vol. 49(C).
    4. Kitano, Shigeto & Takaku, Kenya, 2020. "Capital controls, macroprudential regulation, and the bank balance sheet channel," Journal of Macroeconomics, Elsevier, vol. 63(C).
    5. Hory, Marie-Pierre & Levieuge, Grégory & Onori, Daria, 2021. "Public spending, currency mismatch and financial frictions," Journal of International Money and Finance, Elsevier, vol. 116(C).
    6. Agénor, Pierre-Richard & Jia, Pengfei, 2020. "Capital controls and welfare with cross-border bank capital flows," Journal of Macroeconomics, Elsevier, vol. 65(C).
    7. Shigeto Kitano & Kenya Takaku, 2022. "Financial market incompleteness and international cooperation on capital controls," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(4), pages 624-642, December.
    8. Shigeto Kitano & Kenya Takaku, 2017. "Capital Controls and Financial Frictions in a Small Open Economy," Open Economies Review, Springer, vol. 28(4), pages 761-793, September.
    9. Shigeto Kitano & Kenya Takaku, 2019. "Gains from Policy Cooperation in Capital Controls and Financial Market Incompleteness," Discussion Paper Series DP2019-01, Research Institute for Economics & Business Administration, Kobe University.
    10. Kebalo, Léleng, 2017. "Incidence de l'ouverture économique et de la libéralisation financière des pays de la Communauté Économique des États de l'Afrique de l'Ouest sur leurs activités économiques [Impact of economic ope," MPRA Paper 79442, University Library of Munich, Germany.
    11. Marie-Pierre HORY & Grégory LEVIEUGE & Daria ONORI, 2018. "The (low) fiscal multiplier when debt is denominated in foreign currency," LEO Working Papers / DR LEO 2583, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    12. Yin, Zhichao & Peng, Hongfeng & Xiao, Weiguo & Xiao, Zumian, 2022. "Capital control and monetary policy coordination: Tobin tax revisited," Research in International Business and Finance, Elsevier, vol. 59(C).
    13. Yang Zhou & Shigeto Kitano, 2024. "Effects of Capital Flow Management Measures on Wealth Inequality: New Evidence from Counterfactual Estimators," Discussion Paper Series DP2024-30, Research Institute for Economics & Business Administration, Kobe University, revised Dec 2024.
    14. Yang Zhou & Shigeto Kitano, 2023. "Capital Controls or Macroprudential Policies: Which is Better for Land Booms and Busts?," Discussion Paper Series DP2023-12, Research Institute for Economics & Business Administration, Kobe University, revised Apr 2024.
    15. Yang Zhou & Shigeto Kitano, 2022. "Effectiveness of Capital Controls: Gates versus Walls," Discussion Paper Series DP2022-38, Research Institute for Economics & Business Administration, Kobe University, revised Apr 2023.

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    More about this item

    Keywords

    Capital control; Monetary policy; Balance sheets; Ramsey policy; Exchange rate regimes; Small open economy; Nominal rigidities; New keynesian; DSGE; Welfare comparison; Incomplete markets; Financial accelerator; Financial frictions;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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