Capital Controls for Crisis Management Policy in a Global Economy
J. Scott Davis
Michael B. Devereux
- American Economic Journal: Macroeconomics (Forthcoming)
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 non-cooperative use of capital controls ineffective as crisis management policy. Effective use of capital controls for crisis
management requires international cooperation.
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