Working Paper: NBER ID: w21898
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 macroeconomics; welfare economics
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) | favorable changes in equilibrium interest rates (E43) |
| Unilateral capital controls (F38) | favorable changes in terms of trade (F14) |
| Positive productivity shock (O49) | negative net foreign asset position (F32) |
| negative net foreign asset position (F32) | influence on interest rates (E43) |
| negative net foreign asset position (F32) | influence on terms of trade (F14) |
| Capital controls (F38) | dampen increase in investment (E22) |
| dampen increase in investment (E22) | affect terms of trade (F14) |
| Simultaneous imposition of capital controls by both countries (F38) | ambiguous welfare effects (D69) |
| Symmetric capital controls (F38) | improve terms of trade (F14) |
| Symmetric capital controls (F38) | provide insurance against country-specific shocks (G52) |
| Capital controls (F38) | increase welfare under certain conditions (D69) |
| Terms of trade moving inversely to relative country productivity (F16) | provide insurance against shocks (G52) |