Dilemma Not Trilemma? Capital Controls and Exchange Rates with Volatile Capital Flows
Name
Werning_Dilemma not trilemma.pdf
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334.37 KB
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Author(s)
Farhi, Emmanuel
Werning, Ivan
Date Issued
December 2014
Journal
IMF Economic Review
Publisher
Palgrave Macmillan Publishers
Citation
Farhi, Emmanuel and Werning, Iván. “Dilemma Not Trilemma? Capital Controls and Exchange Rates with Volatile Capital Flows.” IMF Economic Review 62, no. 4 (November 2014): 569–605 © 2014 International Monetary Fund
Version
Author's final manuscript
Abstract
The paper considers a standard New Keynesian model of a small open economy with nominal rigidities and studies optimal capital controls. Consistent with the Mundellian view, it finds that the exchange rate regime is key. However, in contrast with the Mundellian view, the paper finds that capital controls are desirable even when the exchange rate is flexible. Optimal capital controls lean against the wind and help smooth out capital flows.
MIT Department
Massachusetts Institute of Technology. Department of Economics
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Creative Commons Attribution-Noncommercial-Share Alike
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DOI of Published Version
https://doi.org/10.1057/imfer.2014.25
