On the Timing and Optimality of Capital Controls: Public Expenditures, Debt Dynamics and Welfare

Raouf Boucekkine, Aude Pommeret () and Fabien Prieur

Working Papers from LAMETA, Universtiy of Montpellier

Abstract: This paper solves a second-best problem where a government has in particular to choose whether to tax financial inflows (capital con- trols) or not, and when. A multi-stage optimal control technique is used to this end. First, it is shown that it is optimal to switch in finite time from capital controls to full financial liberalization (zero tax on capital inflows) whenever a measure of total wealth is above a cer- tain threshold. In particular, a too large initial debt makes financial liberalization sub-optimal. Second, our analysis suggests that capital controls should be used countercyclically: booms should be responded by more financial liberalization while recessions should rather lead to more stringent capital controls. Third, when public expenditure is chosen in order to maximize social welfare, financial liberalization is not unaffordable only for poor countries, even wealthy countries might find it optimal to implement capital controls if they aim to keep a large amount of public expenditure. In short, the preservation of the welfare states might require a more frequent use of capital controls.

Pages: 16 pages
Date: 2012-05, Revised 2012-05
New Economics Papers: this item is included in nep-pbe
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: On the timing and optimality of capital controls: Public expenditures, debt dynamics and welfare (2013)
Working Paper: On the Timing and Optimality of Capital Controls. Public Expenditures, Debt Dynamics and Welfare (2012)
Working Paper: On the Timing and Optimality of Capital Controls: Public Expenditures, Debt Dynamics and Welfare (2012)
Working Paper: On the timing and optimality of capital controls: Public expenditures, debt dynamics and welfare (2012)
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