The information content of capital controls

Note: There are three effects of capital controls in the model with information and learning, an actual effect and two additional information effects. Tau is the tax rate on foreign borrowing, which represents capital controls in the model. B is the level of foreign borrowing by the domestic economy.

Take-away for policy makers

The findings of this paper could have important implications for policy makers. In designing capital flow management policies, authorities must take into consideration that the environment in which they operate is not invariant to policy actions : it changes as information about the environment is perceived to be transmitted through policy actions, a well-known critique of other macroeconomic policies (Kydland and Prescott 1977). However, my findings do not necessarily imply that clear communication of underlying fundamentals is undesirable: such communication has benefits in relieving information frictions (figure 2, second mechanism), and hence it should be carefully balanced against the undermining of policy efficacy in mitigating the pecuniary externalities stressed in this paper.


Bianchi, Javier. “Overborrowing and Systemic Externalities in the Business Cycle,” American Economic Review, 101(7), 2011, pp. 3400-3426.

Giannone, Domenico, Lucrezia Reichlin and David Small. “The Real-Time Informational Content of Macroeconomic Data,” Journal of Monetary Economics, 55, 2008, pp. 65-676.

Kydland, Finn E., and Edward C. Prescott. “Rules Rather Than Discretion: The Inconsistency of Optimal Plans.” Journal of Political Economy, vol. 85, no. 3, 1977, pp. 473–491.

Mendoza, Enrique. “Sudden Stops, Financial Crisis and Leverage,” American Economic Review, 100(5), 2010, pp. 1941-1966.

Nakamura, Emi and Jon Steinsson. “High Frequency Identification of Monetary Non-Neutrality: The Information Effect,” Quarterly Journal of Economics, Volume 133, Issue 3, 2018, pp. 1283–1330.

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1 Nowcasting refers to forecasting of the very near future.

2 A real-world example is as follows: a financial regulator is charged with the mandate of maintaining financial stability. Hence, the regulator accumulates knowledge and gains expertise through research in this subject area, information collection authorized by the law, onsite examination of financial institutions, stress tests, and other activities. The regulator does not know more than a private sector firm about how to run its business, but it does know more about the overall state of what it regulates.

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