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Capital Controls or Macroprudential Regulation?

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  • Anton Korinek
  • Damiano Sandri
Abstract
We examine the effectiveness of capital controls versus macroprudential regulation in reducing financial fragility in a small open economy model in which there is excessive borrowing because of externalities associated with financial crises and contractionary exchange rate depreciations. We find that both types of instruments play distinct roles: macroprudential regulation reduces the indebtedness of leveraged borrowers whereas capital controls induce more precautionary behavior for the economy as a whole, including for savers. This reduces crisis risk by shoring up aggregate net worth and mitigating the transfer problem that occurs during crises. In advanced countries where the risk of large contractionary depreciations is more limited, the role for capital controls subsides. However, macroprudential regulation remains essential in our model to mitigate booms and busts in asset prices.

Suggested Citation

  • Anton Korinek & Damiano Sandri, 2014. "Capital Controls or Macroprudential Regulation?," NBER Working Papers 20805, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:20805
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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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