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Should developed economies manage international capital flows?

Author

Listed:
  • Dennis Bonam
  • Emmanuel De Veirman
  • Gavin Goy

Abstract

At least since the euro area sovereign debt crisis, it is evident that country risk premium shocks have adverse economic effects, not only in emerging economies, but advanced economies as well. Using a Bayesian Panel Vector Autoregression model, we find that increases in the risk premium lower output under monetary union, yet not in countries with flexible exchange rates and independent monetary policies. We study the transmission mechanism in a two-country New Keynesian model and show that capital controls substantially attenuate the effects of risk premium shocks. However, the welfare gain of imposing capital controls hinges on the nature of the shock and the prevailing exchange rate regime.Â

Suggested Citation

  • Dennis Bonam & Emmanuel De Veirman & Gavin Goy, 2020. "Should developed economies manage international capital flows?," Working Papers 702, DNB.
    • Handle: RePEc:dnb:dnbwpp:702
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    File URL: https://www.dnb.nl/media/zovh5u31/working-paper-no-702.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Bayesian panel VAR; capital controls; exchange rate regime; welfare;
    All these keywords.

    JEL classification:

    • 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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