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On the timing and optimality of capital controls: Public expenditures, debt dynamics and welfare

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Boucekkine, Raouf [UCL] Pommeret, Aude [Université de Savoie] Prieur, Fabien [University of Montpellier I]

This paper solves a second-best problem where a government has to choose whether to tax financial inflows (capital controls) or not, and when. A multi-stage optimal control technique is used to this end. First, it is shown that it is optimal to switch in finite time from capital controls to full financial liberalization whenever a measure of total wealth is above a certain threshold. In particular, a too large initial debt makes financial liberalization sub-optimal. Second, capital controls should be used countercyclically. Third, financial liberalization is not unaffordable only for poor countries, even wealthy countries might find it optimal to implement capital controls if they aim to keep a large amount of public expenditure.

Document type Article de périodique (Journal article) – Article de recherche
Access type Accès restreint
Publication date 2013
Language Anglais
Journal information "International Journal of Economic Theory" - Vol. 9, no.1, p. 101-112 (March 2013)
Peer reviewed yes
Publisher Wiley-Blackwell Publishing Ltd. ((United Kingdom) Oxford)
issn 1742-7355
e-issn 1742-7363
Publication status Publié
Affiliations UCL - SSH/LIDAM/CORE - Center for operations research and econometrics
Aix-Marseille University - GREQAM
University of Montpellier - LAMETA
Université de Savoie - IREGE
Keywords capital controls ; debt ; multi-stage optimal control ; public expenditures ; second-best
Links
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Bibliographic reference Boucekkine, Raouf ; Pommeret, Aude ; Prieur, Fabien. On the timing and optimality of capital controls: Public expenditures, debt dynamics and welfare. In: International Journal of Economic Theory, Vol. 9, no.1, p. 101-112 (March 2013)
Permanent URL http://hdl.handle.net/2078.1/130300