Working Paper: CEPR ID: DP11080
Authors: Jonathan Heathcote; Fabrizio Perri
Abstract: In a standard two-country international macro model, we ask whether imposing restrictions on international non contingent borrowing and lending is ever desirable. The answer is yes. If one country imposes capital controls unilaterally, it can generate favorable changes in the dynamics of equilibrium interest rates and the terms of trade, and thereby benefit at the expense of its trading partner. If both countries simultaneously impose capital controls, the welfare effects are ambiguous. We identify calibrations in which symmetric capital controls improve terms of trade insurance against country-specific shocks and thereby increase welfare for both countries.
Keywords: capital controls; international risk sharing; terms of trade
JEL Codes: F32; F41; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unilateral capital controls (F38) | beneficial changes in equilibrium interest rates (E43) |
| unilateral capital controls (F38) | beneficial changes in terms of trade (F14) |
| unilateral capital controls (F38) | dampen increase in investment in the more productive country (F21) |
| dampen increase in investment in the more productive country (F21) | negatively affect terms of trade (F14) |
| symmetric capital controls (F38) | improve terms of trade insurance (F14) |
| symmetric capital controls (F38) | increased welfare for both countries (D69) |
| unilateral capital controls (F38) | expand feasible budget set for imposing country (H60) |
| unilateral capital controls (F38) | contract feasible budget set for trading partner (D10) |
| unilateral capital controls (F38) | positive effects for the imposing country (F54) |
| unilateral capital controls (F38) | negative effects for trading partner (F10) |
| both countries imposing capital controls (F38) | ambiguous welfare effects (D69) |