A Theory of Capital Controls as Dynamic Terms-of-Trade Manipulation / Arnaud Costinot, Guido Lorenzoni, Iván Werning.

Format:

Book

Author/Creator:

Costinot, Arnaud.

Contributor:

National Bureau of Economic Research.

Lorenzoni, Guido.

Werning, Iván.

Series:

Working Paper Series (National Bureau of Economic Research) no. w17680.

NBER working paper series no. w17680

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2011.

Summary:

This paper develops a simple theory of capital controls as dynamic terms-of-trade manipulation. We study an infinite horizon endowment economy with two countries. One country chooses taxes on international capital flows in order to maximize the welfare of its representative agent, while the other country is passive. We show that capital controls are not guided by the absolute desire to alter the intertemporal price of the goods produced in any given period, but rather by the relative strength of this desire between two consecutive periods. Specifically, it is optimal for the strategic country to tax capital inflows (or subsidize capital outflows) if it grows faster than the rest of the world and to tax capital outflows (or subsidize capital inflows) if it grows more slowly. In the long-run, if relative endowments converge to a steady state, taxes on international capital flows converge to zero. Although our theory emphasizes interest rate manipulation, the country's net financial position per se is irrelevant.

Notes:

Print version record

December 2011.