Crises and capital controls in small open economies: a stock–flow consistent approach

Abstract

This paper attempts to explain the role of capital inflows in creating economic booms and busts in a small open economy with sovereign currency. We develop a stock–flow consistent (SFC) model for a small open economy while relying on the experience of the Icelandic crisis. We demonstrate the destabilising effects of capital inflows on the economy by allowing for a sudden stop, and also discuss the role of capital controls as a policy response in the event of a crisis due to sudden stops. Finally, we discuss the policy implications of our results in order to tackle the destabilising effects associated with financial flows in a small economy.

Cross-border financial flows and global warming in a two-area ecological SFC model

“…Dezter (2018) shows that increasing inequality can generate different growth regimes, depending on country-specific institutional structures and regulatory frameworks. Finally, Raza et al (2019) analyse how financial flows can contribute to destabilise a small economy and propose a mix of policy measures that can help taming the ensuing financial and economic instability.…”

Are EU Policies Effective to Tackle the Covid-19 Crisis? The Case of Italy

“…Similarly, the Department for Production Development (DEDP), supervised by the Minister of Production of Argentina (MIPROD), has developed a SFC model for the analysis of Argentinian economy (Michelena et al 2017), lately enhanced by Guaita and Michelena (2019). There are also TTD models for other South-American countries, including Colombia (Escobar-Espinoza 2016), small economies like Moldova (Le Heron and Yol 2019), and Iceland (Raza et al 2019). There is also an empirical analysis of the South Africa economy using a combination of DSGE and SFC framework (Makrelov et al 2018).…”

Editorial to the special issue on empirical stock–flow consistent models

“…7 At present, SFC models have been developed for many countries. Apart from those already mentioned, developed by Godley and his associates, there are now models for Argentina (Valdecantos 2012), Austria (Miess/Schmelzer 2016a; 2016b), Colombia (Escobar-Espinoza 2016), Denmark (Kiel 2018), Greece (Papadimitriou et al 2013a), Iceland (Raza et al 2019), Ireland (Kinsella/Aliti 2013), Italy (Zezza 2018; Passarella 2019), Moldova (Le Heron/Yol 2019), South Africa (Makrelov et al 2018) and the United Kingdom (Burgess et al 2016).…”