The Prudential Use of Capital Controls and Foreign Currency Reserves

No 787, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: We provide a simple framework to study the prudential use of capital controls and currency reserves that have been explored in the recent literature. We cover the role of both pecuniary externalities and aggregate demand externalities. The model features a central policy dilemma for emerging economies facing large capital outflows: the choice between increasing the policy rate to stabilize the exchange rate and decreasing the policy rate to stabilize employment. Ex ante capital controls and reserve accumulation can help mitigate this dilemma. We use our framework to survey the recent literature and provide an overview of recent empirical findings on the use of these policies.

Keywords: Capital controls; foreign exchange interventions; Monetary policy; Macroprudential policies (search for similar items in EconPapers)
JEL-codes: F32 F33 F41 F42 G18 (search for similar items in EconPapers)
Pages: 61
Date: 2021-11-12
New Economics Papers: this item is included in nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (8)

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Working Paper: The Prudential Use of Capital Controls and Foreign Currency Reserves (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:93469

DOI: 10.21034/wp.787

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