This paper shows that in a small open economy with downward nominal wage rigidity pegging the nominal exchange rate creates a pecuniary externality. The externality causes unemployment, overborrowing, and depressed consumption. Ramsey optimal capital controls are shown to be prudential in the sense that they tax capital inflows in good times and subsidize external borrowing in bad times. Under ...

We consider a small-open, collateral-constrained AK economy. We show that the combination of CARA preferences and uncertainty on capital inflows in such an economy generates long-term (expected) growth while the deterministic counterpart does not. In this framework, long-term growth is entirely driven by precautionary savings. In particular, we show that the asymptotic growth rate of the expect...

Controls on short-term capital inflows or panic-driven capital outflows may benefit emerging markets with fragile financial sectors and adjustable-peg currency regimes. However, the controls seen so far are relatively easy to evade, often complex and obscure, and supported by large corruptible bureaucracies. A tax on foreign-exchange payments avoids these drawbacks. It is transparent, inexpensi...

Much of the literature on capital inflow sudden stops uses models with short term debt only but draws conclusions about the role of debt maturities in crises. In this paper short and long term debt are introduced in an infinite horizon, representative agent model that is consistent with modern open economy macroeconomic models of the type presented in Obstfeld and Rogoff (1996). Phase diagrams ...

In this paper we present a model of international interest rate arbitrage under conditions of entry and exit costs to and from the domestic capital market. We seek to measure the maximum potential effect of capital controls, such as non-interest paying reserve requirements, on interest rate differentials. We quantify the effect of such taxes using a dynamic optimization model with uncertainty a...

In a post-crisis scenario, the global economy has entered into an episode of gradual recovery characterized, in part, by different growth velocities and capital flows to emerging market economies. This global environment has opened a debate relative to macroprudential regulation, financial stability and capital flows. In this paper I highlight the importance of this latest aspect, particularly ...

Foreign portfolio investment is threatened by the risk of default and repudiation, while direct foreign investment isthreitened by the risk of expropriation. These two contractual forms of investment can differ substantially in: (I) the amount of capital they can transfer from abroad to capital-importing countries; (2) the shadow cost of capital and (3) their implications for the tax policy of ...

This paper examines the role of local housing supply conditions for social capital investment. Using an instrumental variables approach and data from the Social Capital Community Benchmark Survey, it is documented that the positive link between homeownership and individual social capital investment is largely confined to more built-up neighborhoods (with more inelastic supply of new housing). T...