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.
Bacchetta, Philippe, Kenza Benhima, and Yannick Kalantzis.
"Capital Controls with International Reserve Accumulation: Can This Be Optimal?"
American Economic Journal: Macroeconomics,
Central Banks and Their Policies
Current Account Adjustment; Short-term Capital Movements
Open Economy Macroeconomics
International Linkages to Development; Role of International Organizations
Development Planning and Policy: Trade Policy; Factor Movement; Foreign Exchange Policy
Socialist Institutions and Their Transitions: International Trade, Finance, Investment, Business, and Aid