Capital Flows and Policy Dilemmas
Friday, Jan. 3, 2020 2:30 PM - 4:30 PM (PDT)
- Chair: Louphou Coulibaly, University of Pittsburgh
A Macroprudential Theory of Foreign Reserve Accumulation
AbstractThis paper proposes a theory of international reserves as a macroprudential policy tool. In a dynamic model with overborrowing externalities, we show that the constrained-efficient allocations can be implemented with reserve accumulation. The optimal reserve accumulation policy leans against the wind and significantly reduces the exposure to financial crisis. The theory is consistent with the joint dynamics of private and official capital flows, both over time and in the cross section.
The Global Financial Resource Curse
AbstractThis paper provides a model in which forming a monetary union fosters financial integration by eliminating currency risk. Higher financial integration can lead to a better allocation of capital across the members of the monetary union, and thus higher welfare. Higher financial integration, however, can also lead to perverse outcomes, characterized by capital flights out of capital-scarce countries toward the rest of the union. The model thus suggests that active policy interventions on the financial markets might be needed to ensure that forming a currency union has a positive impact on welfare.
Monetary Policy in Sudden Stops-Prone Economies
AbstractMonetary policy procyclicality is a pervasive feature of emerging market economies. In this paper, I propose a parsimonious theory explaining this fact in a model where access to foreign financing depends on the real exchange rate and the government lacks commitment. The discretionary monetary policy is procyclical to mitigate balance sheet effects originating from exchange rate depreciations during sudden stops. Committing to an inflation targeting regime is found to increase social welfare and reduce the frequency of financial crises, despite increasing their severity. Finally, the ability to use capital controls induces a less procyclical discretionary monetary policy and delivers higher welfare gains than an inflation targeting regime by reducing both the frequency and the severity of crises.
- F0 - General
- E0 - General