Financial Market Incompleteness and International Cooperation on Capital Controls
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.
Financial markets; Incomplete markets; Policy cooperation; Capital controls; Optimal policy; Welfare; Ramsey policy; Open-loop Nash game
D52, E61, F32, F38, F42, G15
Research Institute for Economics and Business Administration
Rokkodai-cho, Nada-ku, Kobe
Faculty of International Studies, Hiroshima City University