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The B.E. Journal of Macroeconomics

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Capital controls as a credit policy tool in a small open economy

Shigeto Kitano / Kenya Takaku
  • Faculty of International Studies, Hiroshima City University, Asa-Minami-Ku, Hiroshima 731-3194, Japan
  • Other articles by this author:
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Published Online: 2017-10-11 | DOI: https://doi.org/10.1515/bejm-2016-0231

Abstract

We develop a sticky price, small open economy model with financial frictions à la [Gertler, Mark, and Peter Karadi. 2011. “A Model of Unconventional Monetary Policy.” Journal of Monetary Economics 58 (1): 17–34.], in combination with liability dollarization. An agency problem between domestic financial intermediaries and foreign investors of emerging economies introduces financial frictions in the form of time-varying endogenous balance sheet constraints on the domestic financial intermediaries. We consider a shock that tightens the balance sheet constraint and show that capital controls, the effects of which are rigorously examined as a policy tool for the emerging economies, can be a credit policy tool to mitigate the negative shock.

Keywords: balance sheets; capital control; credit policy; crisis; DSGE; financial frictions; financial intermediaries; New Keynesian; nominal rigidities; small open economy

JEL Classification: E44; E58; F32; F38; F41

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About the article

Published Online: 2017-10-11


Citation Information: The B.E. Journal of Macroeconomics, Volume 18, Issue 1, 20160231, ISSN (Online) 1935-1690, DOI: https://doi.org/10.1515/bejm-2016-0231.

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