Should Developed Economies Manage International Capital Flows? An Empirical and Welfare Analysis

Dennis Bonam, Gavin Goy*, Emmanuel de Veirman

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

The literature on the effects of country risk premium shocks has largely focused on emerging market economies. We empirically show that in developed economies, risk premium shocks explain a non-trivial share of aggregate fluctuations and are key drivers of real activity during crises. Our empirical results and results from a two-country New Keynesian model indicate that an increase in the risk premium leads to a reduction in aggregate output under monetary union, but not so in countries with flexible exchange rates and independent monetary policy. Model simulations suggest that managing international capital flows enhances welfare in countries under monetary union.

Original languageEnglish
Pages (from-to)1511-1538
Number of pages28
JournalOxford Bulletin of Economics and Statistics
Volume86
Issue number6
DOIs
Publication statusPublished - Dec 2024

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© 2024 The Author(s). Oxford Bulletin of Economics and Statistics published by Oxford University and John Wiley & Sons Ltd.

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