Flow specific capital controls for emerging markets

Stellenbosch Working Paper Series No. WP12/2017
 
Publication date: October 2017
 
Author(s):
[protected email address] (Department of Economics, University of Stellenbosch)
[protected email address] (Department of Economics, University of Stellenbosch)
 
Abstract:

This paper investigates the impact of capital controls on business cycle fluctuations and welfare. To perform this analysis, we deploy an asymmetric two country model that is subject to negative foreign interest rate shocks. The results show that both an inflow and outflow capital control are able to attenuate capital flow dynamics, but each control bears different implications for macroeconomic outcomes. Whilst the outflow capital control is associated with shock attenuation benefits, the inflow capital control is shown to amplify the impact of shocks. Easier capital control regimes enhance the attenuation and amplification properties associated with each capital control, whilst strict regimes do the opposite. Lastly, the analysis shows that the welfare effects of capital controls are agent dependent, and that society prefers the outflow capital control to the inflow capital control. Taken together, these results are indicative of the comparative desirability of capital controls imposed on the financial sector (outflows) as compared to the real sector (inflows).

 
JEL Classification:

E21, E32, E43, E44, E51, E52

Keywords:

Capital controls, Welfare, Wealth, Real business cycle, Financial intermediation, DSGE

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BER Weekly

11 December 2017
In the domestic section we unpack the 2017Q3 GDP data from Statistics South Africa (Stats SA). In all, a strong performance in the primary sector, combined with a solid improvement in manufacturing, resulted in overall growth beating market expectations. We also discuss the first real data for 2017Q4 in the form of mining output figures for October....

Read the full issue