Capital Flow Management with Multiple Instruments / Viral V. Acharya, Arvind Krishnamurthy.

Format:

Book

Author/Creator:

Acharya, Viral V.

Contributor:

National Bureau of Economic Research.

Krishnamurthy, Arvind.

Series:

Working Paper Series (National Bureau of Economic Research) no. w24443.

NBER working paper series no. w24443

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

We examine theoretically the role of reserves management and macro-prudential capital controls as ex-post and ex-ante safeguards, respectively, against sudden stops, and argue that these measures are complements rather than substitutes. Absent capital controls, reserves to be deployed ex post are partially undone ex ante by short-term capital flows, a form of moral hazard from the insurance provided by reserves in sudden stops. Ex ante capital controls offset this distortion and thereby increase the benefit of holding reserves. Thus, these instruments are complements. With foreign investment flows into both domestic and external borrowing markets, capital controls need to account for the possibility of regulatory arbitrage between the markets. Through the lens of the model, we analyze movements in foreign reserves, external debt, and the range of capital controls being employed by one large emerging market, viz. India.

Notes:

Print version record

March 2018.