The Information Content of Capital Controls
Capital controls, policy measures used by governments to regulate cross-country financial flows, have become standard policy options in many emerging market economies. This paper will focus on what capital controls reveal about the state of the eco...
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| Language: | English |
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World Bank, Washington, DC
2020
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| Online Access: | http://documents.worldbank.org/curated/en/864531596112858742/The-Information-Content-of-Capital-Controls http://hdl.handle.net/10986/34261 |
| Summary: | Capital controls, policy measures used
by governments to regulate cross-country financial flows,
have become standard policy options in many emerging market
economies. This paper will focus on what capital controls
reveal about the state of the economy and the implications
of such revelation for policy efficacy. Using a small open
economy model with a collateral constraint and
over-borrowing relative to the social optimum, I incorporate
a representative agent's Bayesian updating of
information in response to change in policy and show that
the efficacy of capital controls to contain financial crises
and improve welfare could be undermined if the agent
rationally learns from policy. Empirically, this paper finds
that capital controls convey important information market
participants use to improve their understanding of
fundamentals. This paper highlights the need for
policymakers to take into account the un-intended
consequences of information revelation in the design of
capital ow management policies. |
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