We examine optimal monetary policy under prevailing Chinese policies – including capital controls, nominal exchange rate targets, and costly sterilization of foreign capital inflows. China’s combination of capital controls and exchange rate pegs disrupts its monetary policy, precluding adjustments that could maintain macroeconomic stability following a set of shocks that mirror its experience d...

experienced a massive reversal of the large foreign private capital inflows they had enjoyed through much of the 1990s. The net swing from inflows to outflows between 1996 and 1997 amounted to more than $100 billion for the five crisis countries—Indonesia, the Republic of Korea, Malaysia, the Philippines, and Thailand—or 11 percent of their gross domestic product (GDP) before the crisis. The re...

International Monetary Fund (IMF) programmes are thought to function as a seal of approval to international markets although evidence suggests that Fund programmes do not attract capital inflows. Existing studies fail to address the effects of selection into IMF programmes, which raises questions about the robustness of the findings. Correcting for selection bias, I find that states under Fund ...

The Congressional Budget Office’s analyses of the long-term effects of changes in federal fiscal policy include the effects of changes in federal budget deficits on aggregate output and income. Those effects depend on the responses of private saving and net inflows of foreign capital to changes in deficits. This paper reviews empirical estimates of those two effects and explains how changes in ...

The role of foreign direct investment (FDI) in small island developing states (SIDS) is an issue that has been neglected until relatively recently. The reasons for this lack of interest are unsurprising, given both the low absolute volume of capital flows involved and the general neglect of issues relating directly to SIDS in the mainstream theoretical and empirical economics literature. For SI...

I study optimal capital flow management in a small open-economy DSGE model with two frictions: downward nominal wage rigidity and a pricedependent collateral constraint. Wage rigidity introduces an aggregate demand externality under fixed exchange rates and the collateral constraint introduces a pecuniary externality. I provide an analytical characterization of the optimal capital flow manageme...

Capital controls can take many different forms and are broadly defined as any restrictions on the movement of capital across a country’s borders. This article focuses on the debate on the merits of capital controls for emerging markets and developing economies. It describes the potential costs and benefits of capital controls, focusing on the recent empirical literature evaluating the impact of...

In a global context foreign direct investment (FDI) and migration substitute one another in the matching process between workers and firms. However, as labor flows can lead to the formation of business networks, migration can actually facilitate FDI in the long-run. We first present a stylized model for a small open economy illustrating these offsetting effects. We then use U.S. data on bilater...