Working Paper: NBER ID: w29476
Authors: Javier Bianchi; Guido Lorenzoni
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: No keywords provided
JEL Codes: F32; F33; F41; F42; G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital controls (F38) | employment (J68) |
| capital controls (F38) | exchange rate (F31) |
| reserve accumulation (E21) | employment (J68) |
| reserve accumulation (E21) | exchange rate (F31) |
| capital controls + reserve accumulation (F32) | tradeoff between unemployment and currency depreciation (F31) |
| capital flight effects (F32) | employment (J68) |
| capital flight effects (F32) | exchange rates (F31) |