Abstract: There is a debate on whether capital control can effectively resist external shocks and achieve macroeconomic stability.In this paper, the DSGE model of open economy is constructed to study the role of capital control tools such as investment restriction and counter cyclical financial transaction tax in achieving macroeconomic stability and improving social welfare.By comparing the volatility and impulse response function of the main macroeconomic variables under different policy arrangements, it can be found that the use of counter cyclical financial transaction tax as a capital control tool has a comparative advantage in resisting external shocks and maintaining macroeconomic stability.Capital control with investment restrictions promotes the independence of monetary policy, which can focus on the management of domestic economic growth and inflation. Through the welfare analysis under different policy arrangements, it can be seen that increasing the restrictions on investment in foreign assets has a negative effect on the promotion of social welfare, while increasing the capital control of counter cyclical financial transaction tax can reduce the distortion of resource allocation caused by investment restrictions, so as to relax the restrictions on investment in foreign assets and fundamentally improve social welfare.Therefore, in the choice of capital control instruments, the adoption of counter cyclical financial transaction tax may be better than the adoption of investment restrictions. With the maturity of the basic conditions of capital account opening, replacing investment restrictions with financial transaction tax is more in line with the demand of floating exchange rate system and free exchange capital account.

Key words: capital control, macroeconomic stability, social welfare, dynamic stochastic general equilibrium