Capital Controls as a Credit Policy Tool in a Small Open Economy
We develop a sticky price, small open economy model with financial frictions à la Gertler and Karadi (2011), in combination with liability dollarization. An agency problem between domestic financial intermediaries and foreign investors of emerging economies introduces financial frictions in the form of time-varying endogenous balance sheet constraints on the domestic financial intermediaries. We consider a shock that tightens the balance sheet constraint and show that capital controls, the effects of which are rigorously examined as a policy tool for the emerging economies, can be a credit policy tool to mitigate the negative shock.
Capital control, Credit policy, Balance sheets, Small open economy, Nominal rigidities, New Keynesian; DSGE, Financial intermediaries, Financial frictions; Crisis
E44, E58, F32, F38, F41
Research Institute for Economics and Business Administration
Rokkodai-cho, Nada-ku, Kobe
Faculty of International Studies, Hiroshima City University