Posted

December 21, 2011 07:18:45 AM

Date

2011-12

Author

Anton Korinek

Affiliation

Research Department, IMF

Title

The New Economics of Capital Controls Imposed for Prudential Reasons

Summary /
Abstract

This paper provides an introduction to the new economics of prudential capital controlsin emerging economies. This literature is based on the notion that there are externalities associated with financial crises because individual market participants do not internalize their contribution to aggregate financial instability when they make their finacing decisions. As a result they impose externalities in the form of greater financial instability on each other, and the private financing decisions of individuals are distorted towards excessive risk-taking. We discuss how prudential capital controls can induce private agents to internalize these externalities and thereby increase macroeconomic stability and enhance welfare.

Keywords

Financial crises, balance sheet effects, pecuniary externalities, capital controls

URL

http://www.imf.org/external/pubs/ft/wp/2011/wp11298.pdf

See

More articles ...