A Theory of Capital Controls as Dynamic Terms-of-Trade Manipulation

Arnaud Costinot · Guido Lorenzoni · Iván Werning

155 citations0/0 files storedJournal of Political Economy

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Global Financial Crisis and Policies Monetary Policy and Economic Impact Global trade and economics

Abstract

We develop a theory of capital controls as dynamic terms-of-trade manipulation. We study an infinite-horizon endowment economy with two countries. One country chooses taxes on international capital flows in order to maximize the welfare of its representative agent, while the other country is passive. We show that a country growing faster than the rest of the world has incentives to promote domestic savings by taxing capital inflows or subsidizing capital outflows. Although our theory of capital controls emphasizes interest rate manipulation, the pattern of borrowing and lending, per se, is irrelevant.

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References

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