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Should Developed Economies Manage International Capital Flows? An Empirical and Welfare Analysis

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  • Dennis Bonam
  • Gavin Goy
  • Emmanuel de Veirman

Abstract

The literature on the effects of country risk premium shocks has largely focused on emerging market economies. We empirically show that in developed economies, risk premium shocks explain a non‐trivial share of aggregate fluctuations and are key drivers of real activity during crises. Our empirical results and results from a two‐country New Keynesian model indicate that an increase in the risk premium leads to a reduction in aggregate output under monetary union, but not so in countries with flexible exchange rates and independent monetary policy. Model simulations suggest that managing international capital flows enhances welfare in countries under monetary union.

Suggested Citation

  • Dennis Bonam & Gavin Goy & Emmanuel de Veirman, 2024. "Should Developed Economies Manage International Capital Flows? An Empirical and Welfare Analysis," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 86(6), pages 1511-1538, December.
    • Handle: RePEc:bla:obuest:v:86:y:2024:i:6:p:1511-1538
    DOI: 10.1111/obes.12628
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