Abstract
I set up a three-country business cycle model with one advanced (AE) and two emerging economies (EMEs) to analyze the spillover effects arising from capital controls. Following a push-factor shock from the AE, if one EME tightens capital controls, the other EME experiences an additional wave of foreign investments, which amplify the macroeconomic boom. The spillovers effects are welfare improving for the other EME, which can borrow at a lower interest rate. Moderate capital controls may be useful to EMEs to affect the interest rate at which they trade international bonds. Coordination among EMEs in setting capital controls delivers relatively small welfare gains compared with the Nash equilibrium.
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