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

14 December
A barrage of domestic data was released this week, most of which point to a relatively solid start for the economy in 2018Q4 - following the better-than-expected Q3 GDP print. Besides the data releases, it is worth highlighting that President Ramaphosa suggested in a radio interview on Thursday that the government was unlikely to provide Eskom with...

Read the full issue