The prisoner's dilemma, it seems, is still a profitable mine in economic academia.
A couple of researchers at the New York Fed are out with a new paper on capital controls. In it, conventional wisdom (and the aforementioned dilemma) proves right and the contrarian view, dating from the Asian financial crisis 15 years ago, wrong.
When countries simultaneously and independently engage in such interventions in the international flow of capital, not only global but individual welfare is adversely affected….
Countries decide to restrict the international flow of capital exactly when this flow is crucial to ensure cross-border risk sharing. Our findings point to the possibility of costly "capital control wars" and thus to significant gains from international policy coordination.
But here's the really shocking revelation:
The paper does allow that restricting capital flows can make sense from the perspective of an individual nation. It’s just that in following this path, trouble is created for the broader global financial system.
NY Fed Paper Argues Against Capital Controls [WSJ Real Time Economics]