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Crises and capital controls in small open economies: a stock–flow consistent approach

Author

Listed:
  • Hamid Raza

    (Aalborg University, Denmark)

  • Bjorn Runar Gudmundsson

    (Statistics Iceland, Reykjavik, Iceland)

  • Gylfi Zoega

    (University of Iceland, Reykjavik, Iceland)

  • Mikael Randrup Byrialsen

    (Aalborg University, Denmark)

Abstract

This paper attempts to explain the role of capital inflows in creating economic booms and busts in a small open economy with sovereign currency. We develop a stock–flow consistent (SFC) model for a small open economy while relying on the experience of the Icelandic crisis. We demonstrate the destabilising effects of capital inflows on the economy by allowing for a sudden stop, and also discuss the role of capital controls as a policy response in the event of a crisis due to sudden stops. Finally, we discuss the policy implications of our results in order to tackle the destabilising effects associated with financial flows in a small economy.

Suggested Citation

  • Hamid Raza & Bjorn Runar Gudmundsson & Gylfi Zoega & Mikael Randrup Byrialsen, 2019. "Crises and capital controls in small open economies: a stock–flow consistent approach," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 16(1), pages 94-133, April.
    • Handle: RePEc:elg:ejeepi:v:16:y:2019:i:1:p94-133
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    Cited by:

    1. Carnevali, Emilio & Deleidi, Matteo & Pariboni, Riccardo & Veronese Passarella, Marco, 2021. "Cross-border financial flows and global warming in a two-area ecological SFC model," Socio-Economic Planning Sciences, Elsevier, vol. 75(C).

    More about this item

    Keywords

    post-Keynesian; stock–flow consistent; monetary policy; capital controls; sudden stops; financial crisis;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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