Capital Controls or Real Exchange Rate Policy? A Pecuniary Externality Perspective

Abstract

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Capital Controls or Macroprudential Regulation?

“…A detailed analytic description of the resulting case for capital controls is provided in Korinek (2007Korinek ( , 2010 and Bianchi (2011) in a small open economy with a representative agent. Benigno et al (2010Benigno et al ( , 2012Benigno et al ( , 2013aBenigno et al ( , 2013b analyze how the same inefficiencies can be addressed using alternative policy measures. Lorenzoni (2008), Jeanne and Korinek (2010ab), Bianchi and Mendoza (2010) and Korinek (2011b) make the case for macroprudential regulation based on asset price movements that trigger feedback loops.…”

Macroprudential vs. ex-post policy interventions : when domestic taxes are relevant for international lenders

“…Other papers (e.g. Benigno et al 2013bBenigno et al , 2014 also …nd that ex-post or crisismanagement policies (e.g. an exchange rate intervention) may be even more e¤ective because they completely avoid crises rather than only preventing the greater impact that results from the abovementioned externality.…”

“…Suppose that the government imposes a subsidy t < 0 (which is only e¤ective when, in the absence of such subsidy, there would be crisis) on nontradable consumption, which is returned by the household through a lump-sum tax T t . Similarly to Benigno et al (2013bBenigno et al ( , 2014 we interpret this policy as an exchange rate intervention.…”

“…Benigno et al (2013a), in the context of a production small open economy, …nd that both ex-ante and ex-post interventions are needed, although ex-post policies entail larger welfare gains than ex-ante policies do. Benigno et al (2013bBenigno et al ( , 2014 discuss the e¤ectiveness of ex-ante and ex-post interventions and show that a credible commitment to ex-post policies always welfare-dominates ex-ante interventions, as they can achieve the unconstrained allocation (i.e. crises can be avoided).…”

Capital Controls as an Instrument of Monetary Policy

“…While these papers consider the role of capital controls as an instrument of monetary policy, usually under a …xed exchange rate regime, they do not address the role of capital controls in fostering …nancial stability. Korinek (2010), Korinek (2010), Bianchi andMendoza (2013), Bianchi (2011), Benigno, Chen, Otrok, Rebucci andYoung (2013), and Korinek (2013) all discuss how the fact that collateral constraints depend on asset prices, which are subject to ‡uctuations from capital in ‡ows, leads to over-borrowing and …nancial vulnerability in a small open economy. Speci…cally the over-borrowing is caused by a pecuniary externality, where agents don't internalize the e¤ect that their collective actions are having on asset prices, and thus collateral constraints.…”