Has anybody heard economists proclaim the dangerous, welfare reducing and inefficiency inducing effects of capital controls? Well, there are plenty of examples from the past few decades, but a noticeable shift is occurring.
Sure, progressives have long touted a Tobin Tax or some such measure. But that the IMF and the Peterson Institute are coming around wasn’t predicted by many. On the IMF, see Duncan Green’s discussion, and the IMF’s survey magazine from a little while ago.
Now, Peterson released a working paper by Jeanne and Korinek, titled “Excessive Volatility in Capital Flows: A Pigouvian Taxation Approach,” and the abstract reads like this:
“This paper analyzes prudential controls on capital flows to emerging markets from the perspective of a Pigouvian tax that addresses externalities associated with the deleveraging cycle. It presents a model in which restricting capital inflows during boom times reduces the potential outflows during busts. This mitigates the feedback effects of deleveraging episodes, when tightening financial constraints on borrowers and collapsing prices for collateral assets have mutually reinforcing effects. In our model, capital controls reduce macroeconomic volatility and increase standard measures of consumer welfare.”
And that’s in a model of a “small open economy in a one-good world with three time periods t = 0, 1, 2 [ ... ] populated by a continuum of atomistic identical consumers, with a mass normalized to one” — meaning, essentially, it’s a micro-founded optimization framework. The power of your prior makes as well such a GE-model compatible with government intervention. Amazing!
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You should see the bank surrveilance models I’m working on