Capital controls may be justified as a policy to combat a financial crisis. But for large economies, capital controls may have substantial spillovers to the rest of the world. We investigate the case for capital controls in a large open economy, when domestic financial constraints may bind during a crisis. When the crisis country is indebted, it must trade off the desire to tax inflows to improve the terms of trade and tax outflows to ease financial constraints. This trade-off renders noncooperative use of capital controls ineffective as crisis management policy. Effective use of capital controls for crisis management requires international cooperation.
Davis, J. Scott, and Michael B. Devereux.
"Capital Controls for Crisis Management Policy in a Global Economy."
American Economic Journal: Macroeconomics,
Multinational Firms; International Business
International Financial Policy: Financial Transactions Tax; Capital Controls
Open Economy Macroeconomics
Taxation and Subsidies: Efficiency; Optimal Taxation
Business Taxes and Subsidies including sales and value-added (VAT)