Capital Controls or Macroprudential Regulation? / Anton Korinek, Damiano Sandri.

Format:

Book

Author/Creator:

Korinek, Anton.

Contributor:

Sandri, Damiano.

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w20805.

NBER working paper series no. w20805

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2014.

Summary:

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.

Notes:

Print version record

December 2014.