Working Paper: NBER ID: w22481
Authors: Stephanie Schmitt-Grohé; Martín Uribe
Abstract: This paper contributes to a literature that studies optimal capital control policy in open economy models with pecuniary externalities due to flow collateral constraints. It shows that the optimal policy calls for capital controls to be lowered during booms and to be increased during recessions. These findings are at odds with the conventional view that capital controls should be tightened during expansions to curb capital inflows and relaxed during contractions to discourage capital flight.
Keywords: capital controls; open economy models; collateral constraints; macroprudential policy
JEL Codes: E44; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| positive demand shock (E00) | increased collateral value (G32) |
| increased collateral value (G32) | increased credit access (G21) |
| increased credit access (G21) | amplifies economic expansion (F69) |
| negative shock (G41) | decreased collateral value (G33) |
| decreased collateral value (G33) | tightened borrowing constraints (F65) |
| tightened borrowing constraints (F65) | deepens economic contraction (F65) |
| economic boom (E32) | lower capital controls (F38) |
| recession (E32) | raise capital controls (F38) |