This work analyses the impact of the tightening of capital controls by an emerging country on the business cycle of other countries, both advanced and emerging. In addition, the study assesses the potential benefits arising from coordination between emerging economies in the setting of capital controls. Our analysis is based on a stylized model composed of three countries: two emerging and one advanced.
The results show that the tightening of capital controls in an emerging economy induces the advanced economy to move a considerable share of foreign investments to the other emerging country, whose business cycle becomes more volatile. Moreover, the results show that coordination between the two emerging countries produces some benefits for both those economies, though only slightly greater compared with the scenario without coordination.