Capital controls and international financial stability: a dynamic general equilibrium analysis in incomplete markets

Adrian Buss

No 1578, Working Paper Series from European Central Bank

Abstract: In this paper, we conduct an analysis of the implications of capital controls for financial stability. We study a financial transaction (Tobin) tax applicable to cross-border capital flows in a multi-good, multi-country dynamic equilibrium model with incomplete financial markets and heterogeneous agents. The results derived from the model suggest that the impact of capital controls may vary considerably across market segments. In currency markets, capital controls reduce the volatility. However, in international stock markets, their introduction amplifies price movements, thus, increases the volatility; but it reduces a country's vulnerability to external shocks, thereby limiting spillover effects. JEL Classification: F21, F31, G12, G15

Keywords: capital controls; Financial Stability; financial transaction (Tobin) tax; general equilibrium; incomplete financial markets (search for similar items in EconPapers)
Date: 2013-08
New Economics Papers: this item is included in nep-dge and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20131578

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