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- Title
Capital Controls and Financial Frictions in a Small Open Economy.
- Authors
Kitano, Shigeto; Takaku, Kenya
- Abstract
We develop a small open economy model with financial frictions between domestic banks and foreign investors, and examine the welfare-improving effect of capital controls. We show that capital controls are effective in addressing the amplification effect due to financial frictions. As the degree of financial frictions increases, the welfare-improving effect of capital controls becomes larger and a more aggressive policy rule is appropriate. Comparing two economies, one with and one without 'liability dollarization,' we also find that the welfare-improving effect of capital controls is larger in the presence of 'liability dollarization,' and the difference between the effects becomes larger as the degree of financial frictions increases.
- Subjects
CAPITAL movements; FREE trade; INVESTORS; BANKING industry; DOLLARIZATION
- Publication
Open Economies Review, 2017, Vol 28, Issue 4, p761
- ISSN
0923-7992
- Publication type
Article
- DOI
10.1007/s11079-017-9441-4