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Capital Controls and Welfare with Cross-Border Bank Capital Flows

Author

Listed:
  • Pierre-Richard Agénor
  • Pengfei Jia
Abstract
This paper studies the performance of time-varying capital controls on cross-border bank borrowing in an open-economy, dynamic stochastic general equilibrium model with credit market frictions and imperfect capital mobility. The model is calibrated for a middle-income country and is shown to replicate the main stylized facts associated with a fall in world interest rates (capital inflows, real appreciation, credit boom, asset price pressures, and output expansion). A capital controls rule, which is fundamentally macroprudential in nature, is defined in terms of either changes in bank foreign borrowing or cyclical output. An optimal, welfare-maximizing rule is established numerically. The analysis is then extended to solve jointly for optimal countercyclical reserve requirements and capital controls rules. These instruments are complements in the sense that both are needed to maximize welfare. However, a more aggressive reserve requirement rule (which responds to the credit-output ratio) also induces less reliance on capital controls. Thus, at the margin, countercyclical reserve requirements and capital controls are partial substitutes in maximizing welfare.

Suggested Citation

  • Pierre-Richard Agénor & Pengfei Jia, 2015. "Capital Controls and Welfare with Cross-Border Bank Capital Flows," Centre for Growth and Business Cycle Research Discussion Paper Series 212, Economics, The University of Manchester.
    • Handle: RePEc:man:cgbcrp:212
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    Cited by:

    1. Shigeto Kitano & Kenya Takaku, 2017. "Capital Controls and Financial Frictions in a Small Open Economy," Open Economies Review, Springer, vol. 28(4), pages 761-793, September.
    2. Kitano Shigeto & Takaku Kenya, 2018. "Capital controls as a credit policy tool in a small open economy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 18(1), pages 1-19, January.
    3. Johnson, Christopher P., 2021. "International shadow banking and prudential capital controls," Journal of International Money and Finance, Elsevier, vol. 119(C).
    4. Carlos Alberto Zarazúa Juárez, 2021. "Macroprudential regulation as part of the Mexican policy toolkit," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 16(1), pages 1-27, Enero - M.
    5. Agénor, Pierre-Richard & Flamini, Alessandro, 2022. "Institutional mandates for macroeconomic and financial stability," Journal of Financial Stability, Elsevier, vol. 62(C).
    6. Kitano, Shigeto & Takaku, Kenya, 2020. "Capital controls, macroprudential regulation, and the bank balance sheet channel," Journal of Macroeconomics, Elsevier, vol. 63(C).
    7. Pierre-Richard Agénor & Luiz Awazu Pereira da Silva, 2021. "Macroeconomic policy under a managed float: a simple integrated framework," BIS Working Papers 964, Bank for International Settlements.
    8. Pierre‐Richard Agénor & Timothy P. Jackson & Luiz A. Pereira da Silva, 2023. "Global banking, financial spillovers and macroprudential policy coordination," Economica, London School of Economics and Political Science, vol. 90(359), pages 1003-1040, July.
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    More about this item

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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