Showing papers in "Economic Inquiry in 2018"
522 citations
TL;DR: In this paper, the authors describe a number of new urban data sources and illustrate how they can be used to improve the study and function of cities and how survey techniques can be improved to better measure willingness to pay for urban amenities.
Abstract: New, “big data” sources allow measurement of city characteristics and outcome variables at higher collection frequencies and more granular geographic scales than ever before. However, big data will not solve large urban social science questions on its own. Big urban data has the most value for the study of cities when it allows measurement of the previously opaque, or when it can be coupled with exogenous shocks to people or place. We describe a number of new urban data sources and illustrate how they can be used to improve the study and function of cities. We first show how Google Street View images can be used to predict income in New York City, suggesting that similar imagery data can be used to map wealth and poverty in previously unmeasured areas of the developing world. We then discuss how survey techniques can be improved to better measure willingness to pay for urban amenities. Finally, we explain how Internet data is being used to improve the quality of city services. (JEL R1, C8, C18)
141 citations
TL;DR: In this article, the impact of knowledge spillovers on output per worker at the industry level using a primal production function approach was analyzed, and the importance of horizontal and vertical foreign direct investment (FDI) in knowledge spillover was highlighted.
Abstract: This study analyzes the impact of knowledge spillovers on output per worker at the industry level using a primal production function approach. The article makes three different contributions to the international spillovers literature: (1) it identifies trade related spillovers under alternative assumptions regarding the information transferred through imports; (2) it explores the importance of horizontal and vertical foreign direct investment (FDI) in knowledge spillovers; and (3) it looks at how institutional factors determine the impact of FDI-related spillovers on productivity. The main findings of the study are: (1) international knowledge spillover is an important driver of industry output per worker, and the magnitude of this spillover effect varies with alternative assumptions about the information content embodied in imports, while high technology industries benefit significantly more from import-related knowledge spillovers; and (2) the gains from FDI spillovers are primarily horizontal, but when institutional factors are considered, countries with stronger protection of intellectual property rights and a high “ease of doing business” tend to experience a substantial increase in the effectiveness of both horizontal and vertical FDI-related spillovers
71 citations
TL;DR: The authors tried bridging between different behavioral economic explanations for the lack of support of the uncertainty of outcome hypothesis in spectator sports and found that fans' preferences for game uncertainty are dominated by loss aversion.
Abstract: This study tries bridging between different behavioral economic explanations for the lack of support of the uncertainty of outcome hypothesis in spectator sports We test a measure of perceived game uncertainty that is comparable to objective measures frequently tested in the literature Econometric results suggest that fans do not perceive closeness of a game differently than how economists have tended to measure it However, fans' perceptions of suspensefulness are distinct from their perceptions of game uncertainty Moreover, the finding that fans' preferences for game uncertainty are dominated by loss aversion also emerges—independently of fanship status—in our stated-preference setting (JEL L83, D12, Z2)
61 citations
TL;DR: In this article, a game-theoretic model of attack and defense of multiple networks of targets in which there exist intranetwork strategic complementarities among targets is examined.
Abstract: This paper examines a game‐theoretic model of attack and defense of multiple networks of targets in which there exist intranetwork strategic complementarities among targets. The defender's objective is to successfully defend all the networks and the attacker's objective is to successfully attack at least one network of targets. Although there are multiple equilibria, we characterize correlation structures in the allocations of forces across targets that arise in all equilibria. For example, in all equilibria the attacker utilizes a stochastic “guerrilla warfare” strategy in which a single random network is attacked. (JEL C72, D74)
52 citations
TL;DR: The authors studied the evolution of a campus-based aid program for low-income students that began with grant-heavy financial aid and later added a suite of non-financial supports, finding little evidence that program eligibility during the early years (2004-2006), in which students received additional institutional grant aid and few non financial supports, improved postsecondary progress, performance, or completion.
Abstract: We study the evolution of a campus-based aid program for low-income students that began with grant-heavy financial aid and later added a suite of nonfinancial supports. We find little to no evidence that program eligibility during the early years (2004–2006), in which students received additional institutional grant aid and few nonfinancial supports, improved postsecondary progress, performance, or completion. In contrast, program-eligible students in more recent cohorts (2007–2010), when the program supplemented grant-heavy aid with an array of nonfinancial supports, were more likely to meet credit accumulation benchmarks toward timely graduation and earned higher grade point averages than their barely ineligible counterparts. (JEL I21, I23, I24, J08)
50 citations
TL;DR: This paper showed that the value of Bitcoin depends upon self-fulfilling beliefs that are hard to pin down and demonstrated this for the case where Bitcoin is the only form of money in the economy and then generalized the message to the case of multiple Bitcoin clones and/or a competing sovereign currency.
Abstract: The value of Bitcoin depends upon self-fulfilling beliefs that are hard to pin down. We demonstrate this for the case where Bitcoin is the only form of money in the economy and then generalize the message to the case of multiple Bitcoin clones and/or a competing sovereign currency. Some aspects of the indeterminacy we describe would no longer hold if Bitcoin were an interesting-bearing object.
48 citations
TL;DR: In this article, the authors examined data from 2,013 soccer matches played in the German Bundesliga during the seasons from 2007-2008 to 2016-2017 and found that the usual home advantage disappears when the game is in the middle of the week instead of being on the weekend.
Abstract: The home advantage phenomenon is a well-established feature in sports competitions. In this study, we examine data from 2,013 soccer matches played in the German Bundesliga during the seasons from 2007–2008 to 2016–2017. Using a very rich data set, our econometric analysis that is based on matching methods reveals that the usual home advantage disappears when the game is in the middle of the week instead of being on the weekend. Our results indicate that, as the midweek matches are unevenly allocated among teams, the actual schedules of the Bundesliga favor teams with fewer home games in midweek. The study also shows that these soccer-specific findings may have some implications for the design of contests in general. (JEL D00, L00, D20, Z20)
41 citations
TL;DR: The authors used a microblogging dictionary to analyze the content of tweets and found that the aggregate tone of Tweets contains significant information not in betting prices, particularly in the immediate aftermath of goals and red cards.
Abstract: Social media is now used as a forecasting tool by a variety of firms and agencies. But how useful are such data in forecasting outcomes? Can social media add any information to that produced by a prediction/betting market? We source 13.8 million posts from Twitter, and combine them with contemporaneous Betfair betting prices, to forecast the outcomes of English Premier League soccer matches as they unfold. Using a microblogging dictionary to analyze the content of Tweets, we find that the aggregate tone of Tweets contains significant information not in betting prices, particularly in the immediate aftermath of goals and red cards. (JEL G14, G17)
40 citations
TL;DR: The authors examined whether terrorist attacks affect bilateral exchange rates and showed that exchange rate returns of all countries are statistically significantly affected by terrorist attacks, some exchange rates appreciate and some depreciate following a terrorist attack, some currencies experience exchange rate reversals while others experience a persistent effect.
Abstract: This study examines whether terrorist attacks affect bilateral exchange rates. Using historical 10-minute exchange rate data for 21 countries' currency vis-a-vis the U.S. dollar, we show that exchange rate returns of all countries are statistically significantly affected by terrorist attacks. Some exchange rates appreciate and some depreciate following a terrorist attack, some currencies experience exchange rate reversals while others experience a persistent effect. Generally, the effect declines but persists as terrorist attacks become stale information. (JEL F31, F37)
30 citations
TL;DR: In this paper, a risk of default model with asymmetric information and costly screening is introduced to study the U.S. unsecured credit market during the information technology revolution.
Abstract: The information technology (IT) revolution coincided with the transformation of the U.S. unsecured credit market. Households' borrowing increased rapidly and there was an even faster increase in bankruptcy filings. A risk of default model with asymmetric information and costly screening is introduced to study this period. When information costs are high, the design of contracts under private information prevents some households from borrowing with a risk of default. As information costs drop, households borrow more and bankruptcy filings increase. Quantitative exercises suggest that the IT revolution may have played an important role in the transformation of the unsecured credit market. (JEL E43, E44, G33)
TL;DR: In this article, the effects of property rights and the resulting loss aversion on contest outcomes were analyzed and a loss aversion model was introduced to predict average bids in descending order in the loss, the mixed, and the gain treatment.
Abstract: We analyze the effects of property rights and the resulting loss aversion on contest outcomes. We study three situations: in ‘gain’ two players start with no prize and make sunk bids to win a prize; in ‘loss’ both the players start with prizes and whoever loses the contest loses their prize; and in ‘mixed’ only one player starts with a prize that stays with him if he wins, but is transferred to the rival otherwise. Since the differences among the treatments arise only from framing, the expected utility and the standard loss aversion models predict no difference in bids across treatments. We introduce a loss aversion model in which the property rights are made salient, and as a result the reference point varies across treatments. This model predicts average bids in descending order in the loss, the mixed, and the gain treatment; and higher bids by the player with property rights in the mixed treatment. The results from a laboratory experiment broadly support these predictions. There is no significant difference in bids in the loss (gain) treatment and bids by property rights holder (non-holder) in the mixed treatment. A model incorporating both loss aversion and social preferences explains this result.
TL;DR: In this article, the authors study information disclosure policies in all-pay auctions with incomplete information and characterize the unique equilibriums, and completely rank the four policies by various criteria.
Abstract: In this paper, we study information disclosure policies in all-pay auctions with incomplete information. Two symmetric players have either high or low private value. The contest organizer observes players' values ex post, and can commit ex ante to four different symmetric information policies exhaustively: She can fully disclose or conceal the players' types, and she can disclose their types if and only if when both are high or if and only if when both are low. We characterize the unique equilibriums, and completely rank the four policies by various criteria. We find the full concealment policy extracts highest aggregate expected effort, followed by the policy of disclosing types if and only if when both are high. The policy of disclosing types if and only if when both are low induces least aggregate expected effort. Players enjoy highest expected payoffs under the policy of disclosing types if and only if when both are low; the other three policies yield the same expected payoffs to players. In terms of prize allocation efficiency, the full concealment policy is ranked highest and the full disclosure policy is ranked lowest. In between, the other two policies' rankings depend on the probability of high type. (JEL C72, D44, D82, D83, J48).
TL;DR: In this article, the authors consider the collection of novel subjective data on family processes of schooling decisions and argue that collection of data on adolescents' and parents' perceptions of the available school options and the application-and-admission rules, their subjective expectations about short and long-term consequences of alternative choices, and their assessments of the locus of decision making within families could greatly enhance economic modeling and contribute to effective econometric analysis of schooling decision.
Abstract: In this article, we consider the collection of novel subjective data on family processes of schooling decisions. In particular, we review recent progress on survey measurement of expectations, information, and locus of decision of American families within the context of secondary schooling, and we discuss possible future developments by providing concrete examples from recent exploratory efforts. We argue that collection of data on adolescents' and parents' perceptions of the available school options and the application-and-admission rules, their subjective expectations about short- and long-term consequences of alternative choices, and their assessments of the locus of decision making within families could greatly enhance economic modeling and contribute to effective econometric analysis of schooling decisions. (JEL C83, D19, D79, D83, D84, I21, I26, J24)
TL;DR: In this article, the benefits and costs that are capitalized into housing values are measured by analyzing the time-series and cross-sectional variations in the adoption of Colorado's municipality retail marijuana laws and examine the effect on housing values with a difference-in-differences strategy.
Abstract: Does legalizing retail marijuana generate more benefits than costs? This paper provides a first step toward addressing that question by measuring the benefits and costs that are capitalized into housing values. We exploit the time-series and cross-sectional variations in the adoption of Colorado's municipality retail marijuana laws (RMLs) and examine the effect on housing values with a difference-in-differences strategy. Our estimates show that the legalization leads to an average 6% increase in housing values, indicating that the capitalized benefits outweigh the costs. In addition, we find suggestive evidence that this relatively large housing value appreciation is likely due to RMLs inducing strong housing demand while having no discernible effect on housing supply. Finally, we show that the effect of RMLs is heterogeneous across locations and property types. (JEL K20, R28)
TL;DR: In this article, the authors examined the effects of a wide variety of political and sporting events on the hotel room market of Charlotte, North Carolina from 2005 to 2014 and found that two political conventions and NASCAR auto races are associated with large increases in hotel occupancy, prices, and revenue, but many other events have no discernable effect on hotel market.
Abstract: This paper uses daily hotel occupancy data to examine the effects of a wide variety of political and sporting events on the hotel room market of Charlotte, North Carolina from 2005 to 2014. Two political conventions and NASCAR auto races are associated with large increases in hotel occupancy, prices, and revenue, but many other events have no discernable effect on Charlotte's hotel market. The results also indicate that occupancy effects before or after most events are modest at best. Backâofâtheâenvelope calculations show incremental hotelâtax receipts fall short of the debt service incurred in constructing and maintaining the city's sports venues. (JEL H71, Z23, Z28)
TL;DR: The authors investigated the impact of military job relocation on spousal earnings and employment by creating a unique longitudinal database that tracks over 900,000 military spouses over the period 2001-2012, based on data from two administrative sources (military records on personnel and their dependents, and Social Security earnings records).
Abstract: We investigate the impact of military job relocation on spousal earnings and employment by creating a unique longitudinal database that tracks over 900,000 military spouses over the period 2001–2012, based on data from two administrative sources—military records on personnel and their dependents, and Social Security earnings records. This database allows us to estimate the effects of military change of station moves controlling for some key observable characteristics of the service‐member and household and controlling for individual spouse fixed effects. We find that military moves cause a substantial decline in spousal earnings in the year of the move, on the order of $2,100, or 14% of average spousal earnings. Moves also increase the likelihood that the spouse has no earnings for the year. We find larger earnings reductions for moves that cross state lines, and for older spouses, male spouses, and those with young children. The career costs persist over time and spouses continue to experience significantly lower earnings 2 years after the move. This persistence, combined with the typical military member experiencing a change of station move every 2 or 3 years, may substantially limit the ability of military spouses to accumulate human capital over time. (JEL H56, R23, J45, J16, J64)
TL;DR: In this article, the authors examined how cross-border differences in the stringency of bank regulations affect U.S. banks' international activities and found that banks are significantly more likely to enter foreign markets with relatively laxer bank capital and disclosure requirements.
Abstract: This paper examines how cross-border differences in the stringency of bank regulations affect U.S. banks’ international activities. The analysis relies on a unique bank-level dataset on the globally most active U.S. banks’ balance sheet as well as their cross-border, foreign affiliate lending and foreign market entry choices in 82 foreign countries in the 2003-2013 period. Results show that U.S. banks are significantly more likely to enter foreign markets with relatively laxer bank capital and disclosure requirements, and exit foreign markets with relatively stricter deposit insurance schemes and more restrictions on activities. Banks substitute away from foreign affiliate lending (via subsidiaries in the foreign country) towards cross-border lending (originating from the U.S.) in foreign countries with more powerful and independent bank regulators and limits on activities.
TL;DR: The link between happiness and overall inequality is best studied using an index that incorporates different aspects of inequality, and is measured consistently in different countries as mentioned in this paper, which is the degree to which happiness itself varies among individuals.
Abstract: The link between happiness and overall inequality is best studied using an index that incorporates different aspects of inequality, and is measured consistently in different countries. One such index is the degree to which happiness itself varies among individuals. Its correlation with both happiness levels and social trust is substantially stronger than the corresponding correlation for income inequality. This remains so after allowing for bounded scale reporting, including a purely ordinal measure of dispersion. Moreover, the correlation is stronger for individuals who profess to care most about inequality. The link between happiness and inequality may thus be stronger than previously appreciated.
TL;DR: In this paper, the authors estimate whether the Samaritan's dilemma exists in U.S. agriculture, where both private crop insurance and frequent federal disaster assistance are present, and find that bailout expectations are qualitatively and quantitatively important for the insurance decision.
Abstract: The Samaritan's dilemma posits a downside to charity: recipients may rely on free aid instead of their own efforts. Anecdotally, the expectation of free assistance is thought to be important for decisions about insurance and risky behavior in numerous settings, but reliable empirical evidence is scarce. We estimate whether the Samaritan's dilemma exists in U.S. agriculture, where both private crop insurance and frequent federal disaster assistance are present. We find that bailout expectations are qualitatively and quantitatively important for the insurance decision. Furthermore, aid expectations reduce both expenditure on farm inputs and subsequent crop revenue. (JEL D72, H84, Q18)
TL;DR: In this article, the authors find that raising prices leads to substantial increases in illicit retail trade in cigarettes, and that a €1 increase in tax/pack is expected to increase illicit market share by 5 to 12 percentage points and increase illicit cigarette sales by 29% to 95%.
Abstract: Cigarettes are highly taxed in Europe, but at higher prices some consumers substitute more toward illicit cigarettes. The illicit retail trade in cigarettes (IRTC) includes counterfeit, untaxed, and smuggled cigarettes. Some existing literature includes claims that taxes are not an important determinant of IRTC. Using data from the European Union, we find the opposite: raising prices leads to substantial increases in IRTC. A €1 increase in tax/pack is expected to increase illicit market share by 5 to 12 percentage points and increase illicit cigarette sales by 29% to 95%. The results are robust to alternative specifications and data. (JEL I18, H26, K42)
TL;DR: This article found little evidence that the count or composition of enrolled students changed as a result of the Scorecard information shock with the exception of a slight increase in academic preparedness, as measured by SAT scores, among enrollees at colleges with higher reported earnings.
Abstract: Using the universe of SAT score sends to colleges and the exact date on which these scores are sent, we estimate how students responded to the release of the U.S. Department of Education's College Scorecard in September 2015. We find that data on annual cost and graduation rate, both of which were previously available, did not impact the volume of score sends received by colleges. By contrast, we estimate that each 10% increase in reported earnings resulted in a 2.4% increase in score sends. The impact is driven almost entirely by well‐resourced high schools and students. We find little evidence that the count or composition of enrolled students changed as a result of the Scorecard information shock with the exception of a slight increase in academic preparedness, as measured by SAT scores, among enrollees at colleges with higher reported earnings. (JEL I2, I23, I26, I28, L15)
TL;DR: In this article, the authors used the 1968 compulsory education law change in Taiwan, which generated a regression discontinuity design (RDD) setting, to investigate the impact of women's education on fertility.
Abstract: This study investigates the impact of women's education on fertility. For identification, we use the 1968 compulsory education law change in Taiwan, which generated a regression discontinuity design (RDD) setting. We use the whole population of women from the 1980 and 2010 Population Censuses. Results of our RDD estimation using the exact date of birth suggest that the law change was effective in boosting women's education, but it did not have any impact on fertility. This is in stark contrast to most previous studies using only the birth year as the running variable or using it to construct instruments, which find that women's education depresses fertility. This study demonstrates that using a discrete running variable in RDD may generate a false discontinuity for an otherwise continuous regression function. (JEL J13, C21, I2)
TL;DR: In this paper, a stylized model of how a dictator responds to mass protests for democratization in a polarized country with two ethnic or religious groups is presented, and the model's predictions are consistent with the observed differences in the Arab dictators' responses.
Abstract: There were large differences in the responses of Arab dictators to the Arab Spring protests. To understand these differences, I present a stylized model of how a dictator responds to mass protests for democratization in a polarized country with two ethnic or religious groups. In this model, the dictator's response crucially depends on oil revenues and his affiliation to either the majority or the minority group. I document that the model's predictions are consistent with the observed differences in the Arab dictators' responses. Hence, ethnic politics and religious divides may play an important role in political transitions and regime changes.
TL;DR: In this paper, the authors examined how violence, housing insecurity, and other characteristics in one period affect disadvantaged Australian men's and women's chances of experiencing violence and housing insecurity in subsequent periods.
Abstract: Violence and housing insecurity are horrible events that may be intertwined, with violence possibly forcing victims to abandon their accommodations and housing insecurity depriving people of the safety of a home or placing them in compromised circumstances. This study uses national, prospective, longitudinal data from the Journeys Home Survey to examine how violence, housing insecurity, and other characteristics in one period affect disadvantaged Australian men's and women's chances of experiencing violence and housing insecurity in subsequent periods. The study is one of the first to investigate these relationships prospectively and unusual in considering how violence among adult men contributes to their housing insecurity. We estimate dynamic multivariate models that control for observed and time-invariant unobserved characteristics and find that men's chances of being housing secure without experiencing violence are 24-45 percent lower and women's chances are 12- 20 percent lower if they experienced housing insecurity, violence or both in the previous period. Heavy drinking, marijuana use, psychological distress, and a history of childhood abuse and neglect also increase the risks of violence and housing insecurity for both genders, while the presence of children reduces these risks. Women who are bisexual or lesbian and women with homeless friends also face elevated risks of housing insecurity, while men's sexual orientation and friend networks seem less relevant.
TL;DR: In this article, the authors augment a simple Malthusian model by allowing agents to consume something besides food and show that, whereas food supply may remain at subsistence, technological change will have a great impact on the consumption of everything else.
Abstract: We augment a simple Malthusian model by allowing agents to consume something besides food. Whereas food (in our case: bread) is both enjoyable and necessary for survival, the other good, circuses, is pure entertainment: it has absolutely no impact on survival, but does enhance the quality of life. With this very simple modification, we show that, whereas food supply may remain at subsistence, technological change will have a great impact on the consumption of everything else. Most strikingly, though the population remains bound by a Malthusian constraint, sustained improvements to living standards can no longer be ruled out. We also argue that our model better fits the known historical facts‐the widely-held belief that growth prior to the Industrial Revolution was flat is based largely on historical measures of food production. Although food supply throughout history may have been (and for most individuals still is) at or near subsistence levels technological advancements have brought greater convenience and comfort to wealthy and poor alike, a possibility that Malthus himself conceded in his later (and often ignored) work. Therefore, our model not only describes historical growth patterns and demographic transitions better than traditional “Malthusian” models, but is also more in line with Malthus’ later thinking. JEL Classification Numbers: B10, I31, J1, N1, O30
TL;DR: In this article, the economic performance of U.S. state governors with a business background (chief executive officer (CEO) governors) with a matching method was evaluated, and they found that businesspeople tend to take office in times of economic and fiscal strain.
Abstract: This paper evaluates the economic performance of U.S. state governors with a business background (chief executive officer (CEO] governors). Applying a matching method, I find, first, that businesspeople tend to take office in times of economic and fiscal strain. Second, the tenures of CEO governors are associated with a 0.5 percentage points (pp.) higher annual income growth rate, a 0.4 pp. higher growth rate of the private capital stock, and a 0.6 pp. lower unemployment rate than are the tenures of non-CEO governors. State-level income inequality is not affected by CEO governors holding office, indicating that low-income households benefit from the economic upswing.
TL;DR: The 2012 Diary of Consumer Payment Choice (DCPC) as discussed by the authors measures consumer expenditures by tracking authorization of payments by instrument (cash, check, debit or credit card), and three notable results emerge from comparing the 2012 diary of consumer payment choice to other estimates of consumer expenditures: (1) DCPC payments are 75% higher than Consumer Expenditure Survey estimates; (2) consumption estimates are 17% higher higher than comparable personal consumption expenditure estimates; and (3)DCPC payments roughly equal comparably adjusted National Income and Product Accounts personal disposable income.
Abstract: Payment diaries measure consumer expenditures by tracking authorization of payments by instrument (cash, check, debit or credit card, etc.). Three notable results emerge from comparing the 2012 Diary of Consumer Payment Choice (DCPC) to other estimates of consumer expenditures: (1) DCPC payments are 75% higher than Consumer Expenditure Survey estimates; (2) DCPC consumption estimates are 17% higher than comparable personal consumption expenditure estimates; and (3) DCPC payments roughly equal comparably adjusted National Income and Product Accounts personal disposable income. The DCPC's relative success stems from measuring expenditures aggregated into lumpy payments (“shopping baskets”), relatively low respondent burden, and effective random sampling. (JEL E21, D12, D14)
TL;DR: In this paper, the authors apply a variety of propensity score matching methods to address the self-selection problem of policy adoption and find strong evidence that fiscal rules have large and significant treatment effects on lowering government borrowing costs in both international and domestic financial markets.
Abstract: We find that the adoption of numerical fiscal rules reduces government borrowing costs in a sample of 101 advanced and developing countries for 1985–2010. We apply a variety of propensity score matching methods to address the self-selection problem of policy adoption and find strong evidence that fiscal rules have large and significant treatment effects on lowering government borrowing costs in both international and domestic financial markets. The results are robust to changes in country sample and alternative estimation methodology, and are consistent with fiscal rules helping to build policy credibility by reducing the probability of default and the “risk premium” on government debt that compensates lenders for this possibility. (JEL E43, G12, H60)
TL;DR: In this paper, the authors developed a small open economy, New Keynesian model that incorporates a financial accelerator in combination with liability dollarization, and compared the welfare implications of an optimal monetary policy under flexible exchange rates and an optimal capital control policy under fixed exchange rates.
Abstract: We develop a small open economy, New Keynesian model that incorporates a financial accelerator in combination with liability dollarization. Applying a Ramsey‐type analysis, we compare the welfare implications of an optimal monetary policy under flexible exchange rates and an optimal capital control policy under fixed exchange rates. In an economy without the financial accelerator, an optimal monetary policy under flexible exchange rates is superior to an optimal capital control policy under fixed exchange rates. In contrast, in an economy with the financial accelerator, an optimal capital control under fixed exchange rates yields higher welfare than an optimal monetary policy under flexible exchange rates.(JEL E44, E52, F32, F38, F41)