Work

Capital Controls, Monetary Policy, and Balance Sheets in a Small Open Economy

Year: 2017

Type: article

Abstract: We develop a small open economy, New Keynesian model that incorporates a financial accelerator in combination with liability dollarization. Applying a Ramsey‐type analysis, we compare the welfare implications of an optimal monetary policy under flexible exchange rates and an optimal capital control policy under fixed exchange rates. In an economy without the financial accelerator, an optimal monetary policy under flexible exchange rates is superior to an optimal capital control policy under fixed exchange rates. In contrast, in an economy with the financial accelerator, an optimal capital control under fixed exchange rates yields higher welfare than an optimal monetary policy under flexible exchange rates.(JEL E44, E52, F32, F38, F41)

Source: Economic Inquiry

DOI: 10.1111/ecin.12544

Authors: Shigeto Kitano, Kenya Takaku

Institutions: Research Institute for Economics & Business Administration, Kobe University, Kobe University, Hiroshima City University

Language: English

Topic: Monetary Policy and Economic Impact

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

Funder: Japan Society for the Promotion of Science

Awards: Risk Management of Comprehensive Monetary/Fiscal Policy: Theory, Empirics, and Simulations, Macroeconomic policies to manage possible massive capital outflows from emerging economies due to monetary policy normalization in advanced economies, Research on the role of regional financial institutions for regional revitalization