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CAPITAL CONTROLS, MONETARY POLICY, AND BALANCE SHEETS IN A SMALL OPEN ECONOMY
Author(s) -
Kitano Shigeto,
Takaku Kenya
Publication year - 2018
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12544
Subject(s) - economics , monetary policy , financial accelerator , monetary economics , exchange rate , small open economy , capital control , capital (architecture) , welfare , policy mix , new keynesian economics , open economy , macroeconomics , dynamic stochastic general equilibrium , microeconomics , capital flows , market economy , profit (economics) , archaeology , history
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)