Crises and capital controls in small open economies: A stock-flow consistent approach

Hamid Raza, Bjorn Gudmundsson, Gylfi Zoega, Mikael Randrup Byrialsen

Research output: Contribution to journalJournal articleResearchpeer-review

3 Citations (Scopus)

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 languageEnglish
JournalEuropean Journal of Economics and Economic Policies : Intervention
Volume16
Issue number1
Pages (from-to)94-133
Number of pages40
ISSN2052-7764
DOIs
Publication statusPublished - 2019

Keywords

  • Capital controls
  • Financial crisis
  • Monetary policy
  • Post-Keynesian
  • Stock-flow consistent
  • Sudden stops

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