Capital Controls, Monetary Policy, and Balance Sheets in a Small Open Economy
We develop a small open economy, New Keynesian model that incorporates a financial accelerator in combination with liability dollarization. Applying a Ramsey-type analysis, we compare the welfare implications of an optimal monetary policy under flexible exchange rates and an optimal capital control policy under fixed exchange rates. In an economy without the financial accelerator, an optimal monetary policy under flexible exchange rates is superior to an optimal capital control policy under fixed exchange rates. In contrast, in an economy with the financial accelerator, an optimal capital control under fixed exchange rates yields higher welfare than an optimal monetary policy underflexible exchange rates.
Capital control, Monetary policy, Balance sheets, Ramsey policy, Exchange rate regimes, Small open economy, Nominal rigidities, New Keynesian, DSGE, Welfare comparison, Incomplete markets, Financial accelerator, Financial frictions
E44, E52, F32, F38, F41
Research Institute for Economics and Business Administration
Rokkodai-cho, Nada-ku, Kobe
Faculty of International Studies, Hiroshima City University