Gains from Policy Cooperation in Capital Controls and Financial Market Incompleteness

Professor，Research Institute for Economics & Business Administration (RIEB),Kobe University, JAPAN

More information: https://www.rieb.kobe-u.ac.jp/users/kitano/index.html

We examine how the degree of financial market incompleteness affects welfare gains from policy cooperation in capital controls. When financial markets are incomplete, international risk sharing is disturbed. However, the optimal global policy significantly reverses the welfare deterioration due to inefficient risk-sharing. We find that when financial markets are more incomplete, the welfare gap between the optimal global policy and the Nash equilibrium increases, and the welfare gains from policy cooperation in capital controls then become larger.