Abstract
This paper attempts to explain the role of capital inflows in creating economic booms and busts in a small open economy with sovereign currency. We develop a stock-flow consistent (SFC) model for a small open economy while relying on the experience of the Icelandic crisis. We demonstrate the destabilizing effects of capital inflows on the economy by allowing for a sudden stop, and also discuss the role of capital controls as a policy response in the event of a crisis due to sudden stops. Finally, we discuss the policy implications of our results in order to tackle the destabilising effects associated with financial flows in a small economy.
Original language | English |
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Journal | European Journal of Economics and Economic Policies : Intervention |
Volume | 16 |
Issue number | 1 |
Pages (from-to) | 94-133 |
Number of pages | 40 |
ISSN | 2052-7764 |
DOIs | |
Publication status | Published - 2019 |
Keywords
- Capital controls
- Financial crisis
- Monetary policy
- Post-Keynesian
- Stock-flow consistent
- Sudden stops