Dilemma Not Trilemma? Capital Controls and Exchange Rates with Volatile Capital Flows

By Emmanuel Farhi, I. Werning. 2014

221 citations recorded by the source corpus.

The paper considers a standard New Keynesian model of a small open economy with nominal rigidities and studies optimal capital controls. Consistent with the Mundellian view, it finds that the exchange rate regime is key. However, in contrast with the Mundellian view, the paper finds that capital controls are desirable even when the exchange rate is flexible. Optimal capital controls lean against the wind and help smooth out capital flows.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/3539e1427e3bd96677c3e319af1730129bc0c7d5

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Citations in the corpus

If the Fed Sneezes, Who Catches a Cold? (2017, background): “Farhi and Werning (2014) provide an elegant model of such a dilemma.”
Capital Flows and Foreign Exchange Intervention (2019, background): “…Keynesian model of a small open economy, as originally formulated by Gali and Monacelli (2005) and later extended to continuous time by Farhi and Werning (2012), in which I depart from the assumption of frictionless financial markets and assume that international financial markets are imperfect.”
U.S. Monetary Policy and International Risk Spillovers (2019, background): “…that started with the seminal work of Obstfeld and Rogoff (1995).24 Most of the literature assumes 24See also Corsetti and Pesenti (2001), Gali and Monacelli (2005), Farhi and Werning (2014), and Corsetti et al. (2018). frictionless domestic and international markets and no role for risk.”