Capital Controls and International Financial Stability: A Dynamic General Equilibrium Analysis in Incomplete Markets

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may Adrian BussINSEAD; e-mail: adrian.buss@insead.edu AbstractIn this paper, we conduct an analysis of the implications of capital controls for financial stability. We study a financial transaction (Tobin) tax applicable to cross-border capital flows in a multi-good, multi-country dynamic equilibrium model with incomplete financial markets and heterogeneous agents. The results derived from the model suggest that the impact of capital controls may vary considerably across market segments. In currency markets, capital controls reduce the volatility. However, in international stock markets, their introduction amplifies price movements, thus, increases the volatility; but it reduces a country's vulnerability to external shocks, thereby limiting spillover effects.Keywords: capital controls, financial transaction (Tobin) tax, financial stability, incomplete financial markets, general equilibrium JEL classification: F21, F31, G12, G15 Non-Technical SummaryCapital inflow controls, that is, instruments that aim to reduce capital flows into a country or into specific segments of a country's financial markets, have been used and advocated for some decades.For example, as a reaction to fast international capital flows, Tobin proposed to "throw some sand in the wheels" of the international financial markets and introduce capital controls. Lately However, as the empirical evidence for the effectiveness of capital controls is rather inconclusive and theoretical analyses have yielded mixed evidence, the use of capital controls was always accompanied by an intense debate. The objective of this paper is to assess the effectiveness of capital inflow controls and understand their multilateral implications in a dynamic model. Specifically, we want to understand through which channels capital inflow controls work and how effective they are, e.g., if they can reduce exchange rate or stock market volatility, limit the cross-border propagation of shocks or limit currency appreciations. Furthermore, we assess the adverse consequences of their imposition on foreign exchange and stock markets, as well as wealth and welfare.We therefore study a model of a full-information, international, dynamic stochastic general equilibrium economy with uncertainty generated by output as well as demand shocks where each country's financial market consists of a risk-free bond and a risky stock. In this model we characterize capital controls as a transaction tax o...

Evaluando la efectividad de los controles de capital: La experiencia reciente

“…En este contexto, el resurgimiento de los controles de capital ha revitalizado el debate en la literatura sobre su efectividad, sin llegar todavía a una conclusión uniforme. Estudios recientes, como el de Jinjarak et al, (2013), Klein (2012) y Edwards (2012), por ejemplo, sugieren la inefectividad de los controles de capital; los trabajos de Balakrishnan et al, (2012) y Chowdhury y Keller (2012), por su parte, indican que los controles de capital no son efectivos, excepto cuando son complementados por políticas monetarias y fiscales prudenciales; Farhi y Werning (2012), Montoro y Moreno (2011) y Baba y Kokenyne (2011) indican que los controles de capital coadyuvan exclusivamente en reducir la volatilidad cambiaria, mientras Forbes et al, (2015) concluyen que pueden reducir la fragilidad financiera; Buss (2013), por su parte, sugiere que la implementación de un control de capitales tipo Tobin tendría efectos que variarían dependiendo del sector de mercado donde se instaure. 3 3 En evidencia previa a la reciente aplicación de controles de capital, Magud et al, (2011), haciendo una revisión de alrededor de treinta trabajos empíricos, concluyen que en los controles de capital permitieron obtener autonomía monetaria, transformar la composición de los flujos a periodos de más largo plazo y reducir las El objetivo de este trabajo es sumar a la literatura al respecto, contribuyendo al debate empírico acerca de la efectividad de los controles de capital.…”

Habit Formation Heterogeneity: Implications for Aggregate Asset Pricing

“…This discussion does not apply to models, where trading restrictions are imposed exogenously(Longstaff (2009), Wu (2011)) or where it might become optimal not to trade endogenously (see, e.g.,Buss, Uppal, and Vilkov (2011) andBuss and Dumas (2011)). 17 At any point in time, any state, and every grid value the system of non-linear equations is (2(L − 1) + N (L − 1)) = (L − 1)(N + 2)-dimensional.For a trinomial (quadrinomial) tree the "2" should be replaced through "3" ("4").18 See alsoBuss and Dumas (2011) andBuss (2011).…”