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Capital Controls and Monetary Policy Autonomy in a Small Open Economy

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Abstract

Is there a link between capital controls and monetary policy autonomy in a country with a floating currency? Shocks to capital flows into a small open economy lead to volatility in asset prices and credit supply. To lessen the impact of capital flows on financial instability, a central bank finds it optimal to use the domestic interest rate to \"manage\" the capital account. Capital account restrictions affect the behavior of optimal monetary policy following shocks to the foreign interest rate. Capital controls allow optimal monetary policy to focus less on the foreign interest rate and more on domestic variables.

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  • J. Scott Davis & Ignacio Presno, 2017. "Capital Controls and Monetary Policy Autonomy in a Small Open Economy," International Finance Discussion Papers 1190, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1190
    DOI: 10.17016/IFDP.2017.1190
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    More about this item

    Keywords

    Capital controls; Credit constraints; Small open economy;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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