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Capital Controls or Macroprudential Policies: Which is Better for Land Booms and Busts?

Author

Listed:
  • Yang Zhou

    (Institute of Developing Economies, Japan External Trade Organization and Research Institute for Economics & Business Administration (RIEB), Kobe University, JAPAN)

  • Shigeto Kitano

    (Research Institute for Economics and Business Administration (RIEB), Kobe University, JAPAN)

Abstract
Emerging markets have experienced land booms and busts along with international capital inflows and outflows repeatedly. This study quantitatively examines the effectiveness of (i) macroprudential policies targeting land markets and (ii) capital controls targeting capital inflows and outflows. We analyze which policy better manages the coincidence between land booms (busts) and capital inflows (outflows). We build a small open economy NK-DSGE model in which banks choose their asset portfolio between physical capital and land subject to financial constraints. The quantitative results show that the superiority of the two policies depends on the type of shock impacting a small open economy. In the case of domestic land market shocks, macroprudential policies enhance welfare, whereas capital controls reduce welfare. Conversely, in the case of foreign interest rate shocks, the superiority of the two policies is reversed: capital controls enhance welfare, while macroprudential policies deteriorate welfare.

Suggested Citation

  • 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.
    • Handle: RePEc:kob:dpaper:dp2023-12
    as

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    File URL: https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2023-12.pdf
    File Function: Revised version, 2024
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    More about this item

    Keywords

    Capital control; Macroprudential policy; Financial frictions; Balance sheets channel; DSGE;
    All these keywords.

    JEL classification:

    • E69 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Other
    • 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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