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American Economic Journal: Macroeconomics: Vol. 5 No. 3 (July 2013)

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Capital Controls with International Reserve Accumulation: Can This Be Optimal?

Article Citation

Bacchetta, Philippe, Kenza Benhima, and Yannick Kalantzis. 2013. "Capital Controls with International Reserve Accumulation: Can This Be Optimal?" American Economic Journal: Macroeconomics, 5(3): 229-62.

DOI: 10.1257/mac.5.3.229

Abstract

Motivated by the Chinese experience, we analyze an economy where the central bank has access to international capital markets, but the private sector does not. The central bank is modeled as a Ramsey planner who can choose the domestic interest rate and the level of international reserves. Consumers are credit-constrained as in Woodford (1990). We find that a rapidly growing economy has a higher welfare without capital mobility. In the Chinese context, we argue that the domestic interest rate should be temporarily above the international rate and that there should be more foreign asset accumulation than in an open economy.

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Authors

Bacchetta, Philippe (U Lausanne and Swiss Finance Institute)
Benhima, Kenza (U Lausanne)
Kalantzis, Yannick (Bank of France)

JEL Classifications

E58: Central Banks and Their Policies
E62: Fiscal Policy
F32: Current Account Adjustment; Short-term Capital Movements
F41: Open Economy Macroeconomics
O19: International Linkages to Development; Role of International Organizations
O24: Development Planning and Policy: Trade Policy; Factor Movement; Foreign Exchange Policy
P33: Socialist Institutions and Their Transitions: International Trade, Finance, Investment, Business, and Aid

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