Title
Capital Controls and Welfare
Abstract
This paper computes welfare levels under different degree of capital
controls and compares them with the welfare level under perfect
capital mobility by using the methodology of Schmitt-Grohe and Uribe
(2007). We show that perfect capital mobility is not always optimal
and that capital controls may enhance an economy's welfare level.
There exists an optimal degree of capital-account restriction that
achieves a higher level of welfare than that under perfect capital
mobility, if the economy has costly financial intermediaries. The results of our analysis imply that as the domestic financial intermediaries are less
efficient, the government should impose stricter capital controls in
the form of a tax on foreign borrowing.
Keywords: capital controls, welfare, DSGE, small open economy
JEL Classification: F41
Shigeto KITANO
Research Institute for Economics and Business Administration
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501
Japan
Phone: (81) 78 803 7036
Fax: (81) 78 803 7059