Capital Controls, Macroprudential Regulation,and the Bank Balance Sheet Channel
We incorporate a banking sector with balance sheet frictions into a model of a small open economy and compare the effectiveness of capital controls and macroprudential regulation. We show that the welfare-improving effect of capital controls is larger than that of macroprudential regulation if the degree of financial friction between domestic banks and foreign investors is high, while the welfare-improving effect of macroprudential regulation is larger than that of capital controls if the degree of financial friction is low. We also show that the welfare ranking of the two policies depends on whether an economy suffers from liability dollarization.
Capital control, Macroprudential regulation, Financial frictions, Financial intermediaries, Balance sheets, Small open economy,
Liability dollarization, DSGE, Welfare
E69, F32, F38, F41
Research Institute for Economics and Business Administration
Rokkodai-cho, Nada-ku, Kobe
Faculty of International Studies, Hiroshima City University