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

JEL Classification

E69, F32, F38, 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

Faculty of International Studies, Hiroshima City University