RIEB Discussion Paper Series No.2020-05

Title

Financial Market Incompleteness and International Cooperation on Capital Controls

Abstract

We examine how the degree of financial market incompleteness affects welfare gains from international cooperation on capital controls. When financial markets are incomplete, international risk sharing is disturbed. However, the optimal global policy significantly reverses the welfare deterioration due to inefficient risk-sharing. We show that when financial markets are more incomplete, the welfare gap between the optimal global policy and the Nash equilibrium increases, and the welfare gains from international cooperation on capital controls then become larger.

Keywords

Financial markets; Incomplete markets; Policy cooperation; Capital controls; Optimal policy; Welfare; Ramsey policy; Open-loop Nash game

JEL Classification

D52, E61, F32, F38, F42, G15

Inquiries

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

Kenya TAKAKU
Faculty of International Studies, Hiroshima City University