The New Economics of Capital Controls Imposed for Prudential Reasons+L4888
December 1, 2011
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Summary
This paper provides an introduction to the new economics of prudential capital controls in emerging economies. This literature is based on the notion that there are externalities associated with financial crises because individual market participants do not internalize their contribution to aggregate financial instability when they make their finacing decisions. As a result they impose externalities in the form of greater financial instability on each other, and the private financing decisions of individuals are distorted towards excessive risk-taking. We discuss how prudential capital controls can induce private agents to internalize these externalities and thereby increase macroeconomic stability and enhance welfare.
Subject: Asset prices, Balance of payments, Capital controls, Exchange rates, Financial crises, Financial statements, Foreign exchange, Prices, Public financial management (PFM)
Keywords: Asset prices, balance sheet effects, capital controls, Exchange rates, financial crises, Financial statements, foreign currency, Global, long-term debt, Pareto efficiency, pecuniary externalities, pecuniary externality, price movement, short-term debt, WP
Pages:
38
Volume:
2011
DOI:
Issue:
298
Series:
Working Paper No. 2011/298
Stock No:
WPIEA2011298
ISBN:
9781463927844
ISSN:
1018-5941
