Capital Controls and Financial Frictions in a Small Open Economy

Kitano, Shigeto; Takaku, Kenya

doi:10.1007/s11079-017-9441-4

Cited by 13 publications

(7 citation statements)

References 52 publications

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“…Following Kitano and Takaku (2017) there is an infinite lived representative household with GHH utility preference 5 . the households maximize the following expected lifetime utility: (1) where is the expectation operator conditional on date information, is the discount factor for household's utility, is a composite consumption index, is the labor supply, is the relative utility weight of labor to consumption, is the inverse of intertemporal elasticity of substitution, and is the inverse Frisch elasticity of labor supply.…”

Section: Householdsmentioning

confidence: 99%

“…In the next, we will derive the aggregate relation of , and . Here, we follow the same approach proposed by Kitano and Takaku (2017). Let denote the maximum value of defined in (11) given and .…”

Section: Banksmentioning

confidence: 99%

“…After the GFC, researchers started to introduce financial frictions into financial intermediaries to make previous DSGE models more reality (Gertler & Kiyotaki, 2010). In this paper, we develop a small open economy model with financial frictions based on the models proposed by Gertler and Kiyotaki (2010) and Kitano and Takaku (2017). Existence of financial frictions means that bankers have incentives to divert assets and it is easier for bankers to divert foreign borrowing compared to domestic deposits.…”

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confidence: 99%

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Impact of Global Low Interest Rates to the Capital Flows and Financial Vulnerability of Small Open Economies

Wang

Yang

Cheng

2020

Asian Economic and Financial Review

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In this paper, we develop a dynamic stochastic general equilibrium (DSGE) model with financial frictions, to explore how the exogenous global low-interest-rate shock affect the small open economies, and study the effects of two macroprudential policies for protecting the external sector and financial system. We find that, when there are negative world interest rate shocks to ultra-low levels, small open economies will experience capital inflow surge, amplified domestic business cycles and increased financial leverage, leading to accumulation of financial vulnerability. However, the liability-side macroprudential policy depending on foreign debt leverage is effective in smoothing the fluctuations of economic variables. The other asset-side macroprudential policy depending on bank's total asset expansion works in a similar but less effective way. The research results support that it is reasonable for emerging economies to adopt macroprudential policies in the current low-interest-rate environment, and the liabilityside macroprudential policy linking with foreign debt leverage is more effective.Contribution/ Originality: This study contributes to the existing literature by developing a dynamic stochastic general equilibrium (DSGE) model with financial frictions, to explore how the exogenous global low-interest-rate shock affect the small open economies, and study the effects of two macroprudential policies for protecting the external sector and financial system. INTRODUCTIONThe Global Financial Crisis (GFC) and the slow recovery from its aftermath promoted ultra-loose monetary policies among central banks over the past decade. Many central banks in advanced economies quickly lowered policy interest rates to zero or near zero levels, to restart growth and combat persistent deflationary risks. Ten years later after the GFC, with the current sluggish world economy, many central banks started to lower interest rates again 1 and some even used unconventional monetary policies (UMPs), pushing policy interest rates even into negative territory. Moreover, together with persistent macroeconomic headwinds since the GFC (like demographic 1 In the year of 2019, more than 30 central banks started to lower policy interest rates,

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Section: Householdsmentioning

confidence: 99%

Section: Banksmentioning

confidence: 99%

mentioning

confidence: 99%

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Impact of Global Low Interest Rates to the Capital Flows and Financial Vulnerability of Small Open Economies

Wang

Yang

Cheng

2020

Asian Economic and Financial Review

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“…Boucekkine and Pintus (2012) and Boucekkine et al (2018) have for example highlighted the role of external debts in driving macroeconomic and financial instability. More recently, Kitano and Takaku (2017) outline the role of financial frictions in fostering macroeconomic and financial volatility of the emerging countries. They end up advocating for appropriate capital controls for such countries.…”

Section: Introductionmentioning

confidence: 99%

A Pedagogical Note on Risk Sharing Versus Instability in International Financial Integration: When Obstfeld Meets Stiglitz

Boucekkine

Zou

2018

Open Econ Rev

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The pure risk sharing mechanism implies that financial liberalization is growth enhancing for all countries as the world portfolio shifts from safe low-yield capital to riskier high-yield capital. This result is typically obtained under the assumption that the volatilities for risky assets prevailing under autarky are not altered after liberalization. We relax this assumption within a simple two-country model of intertemporal portfolio choices. By doing so, we put together the risk sharing effect and a welldefined instability effect. We identify the conditions under which liberalization may cause a drop in growth. These conditions combine the typical threshold conditions outlined in the literature, which concern the deep characteristics of the economies, and size conditions on the instability effect induced by liberalization.

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“…In recent years, an increasing number of studies examine the effects of capital controls as a regular instrument of economic policy from a broader perspective (e.g., De Paoli and Lipinska ; Farhi and Werning ; Kitano and Takaku ; Schmitt‐Grohé and Uribe ) , . For example, Kitano and Takaku () show that as the degree of financial frictions between banks and foreign creditors increases, more aggressive capital controls are appropriate.…”

Section: Introductionmentioning

confidence: 99%

Capital Controls, Monetary Policy, and Balance Sheets in a Small Open Economy

Kitano

Takaku

2017

Economic Inquiry

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We develop a small open economy, New Keynesian model that incorporates a financial accelerator in combination with liability dollarization. Applying a Ramsey‐type analysis, we compare the welfare implications of an optimal monetary policy under flexible exchange rates and an optimal capital control policy under fixed exchange rates. In an economy without the financial accelerator, an optimal monetary policy under flexible exchange rates is superior to an optimal capital control policy under fixed exchange rates. In contrast, in an economy with the financial accelerator, an optimal capital control under fixed exchange rates yields higher welfare than an optimal monetary policy under flexible exchange rates.(JEL E44, E52, F32, F38, F41)

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Capital Controls and Financial Frictions in a Small Open Economy

Cited by 13 publications

References 52 publications

Impact of Global Low Interest Rates to the Capital Flows and Financial Vulnerability of Small Open Economies

Impact of Global Low Interest Rates to the Capital Flows and Financial Vulnerability of Small Open Economies

A Pedagogical Note on Risk Sharing Versus Instability in International Financial Integration: When Obstfeld Meets Stiglitz

Capital Controls, Monetary Policy, and Balance Sheets in a Small Open Economy

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