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Exchange Controls, Capital Controls, and International Financial Markets

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  • Stockman, Alan C
  • Hernandez D, Alejandro

Abstract

This paper examines the effects of restrictions on international financial m arkets in a general equilibrium, rational expectations model of a two -country world. State-contingent financial markets allow households t o allocate wealth optimally across states so that the imposition of e xchange and capital controls has, roughly speaking, only substitution effects but no wealth effect. Taxes or quantitative controls on purc hases of foreign currency and on the income from foreign assets reduc e international trade in goods, lower ex post welfare in the country in which they are imposed, and affect nominal prices and the exchange rate. Copyright 1988 by American Economic Association.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 78 (1988)
Issue (Month): 3 (June)
Pages: 362-74

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Handle: RePEc:aea:aecrev:v:78:y:1988:i:3:p:362-74

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References

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  1. Adams, Charles & Greenwood, Jeremy, 1985. "Dual exchange rate systems and capital controls: An investigation," Journal of International Economics, Elsevier, vol. 18(1-2), pages 43-63, February.
  2. Cooley, Thomas F & LeRoy, Stephen F & Raymon, Neil, 1984. "Econometric Policy Evaluation: Note," American Economic Review, American Economic Association, vol. 74(3), pages 467-70, June.
  3. Branson, William H. & Henderson, Dale W., 1985. "The specification and influence of asset markets," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 15, pages 749-805 Elsevier.
  4. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  5. Robert E. Cumby, 1984. "Monetary Policy Under Dual Exchange Rates," NBER Working Papers 1424, National Bureau of Economic Research, Inc.
  6. Alan C. Stockman & Lars E.O. Svensson, 1987. "Capital Flows, Investment, and Exchange Rates," NBER Working Papers 1598, National Bureau of Economic Research, Inc.
  7. Svensson, Lars E. O., 1985. "Currency prices, terms of trade, and interest rates: A general equilibrium asset-pricing cash-in-advance approach," Journal of International Economics, Elsevier, vol. 18(1-2), pages 17-41, February.
  8. Alan C. Stockman, 1978. "A Theory of Exchange Rate Determination," UCLA Economics Working Papers 122, UCLA Department of Economics.
  9. Obstfeld, Maurice, 1986. "Capital controls, the dual exchange rate, and devaluation," Journal of International Economics, Elsevier, vol. 20(1-2), pages 1-20, February.
  10. Persson, Torsten, 1984. "Real transfers in fixed exchange rate systems and the international adjustment mechanism," Journal of Monetary Economics, Elsevier, vol. 13(3), pages 349-369, May.
  11. Sargent, Thomas J, 1984. "Autoregressions, Expectations, and Advice," American Economic Review, American Economic Association, vol. 74(2), pages 408-15, May.
  12. Helpman, Elhanan & Razin, Assaf, 1982. "A Comparison of Exchange Rate Regimes in the Presence of Imperfect Capital Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 23(2), pages 365-88, June.
  13. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 865-90, October.
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Citations

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Cited by:
  1. Marvin Goodfriend & Robert G. King, 2001. "The case for price stability," Working Paper 01-02, Federal Reserve Bank of Richmond.
  2. Salvador Valdés, 1989. "Control de Cambios en Países en Desarrollo," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 26(77), pages 115-144.
  3. Cardenas, Mauricio & Barrera, Felipe, 1997. "On the effectiveness of capital controls: The experience of Colombia during the 1990s," Journal of Development Economics, Elsevier, vol. 54(1), pages 27-57, October.
  4. Axel Dreher & Lars-H. Siemers, 2009. "The nexus between corruption and capital account restrictions," Public Choice, Springer, vol. 140(1), pages 245-265, July.
  5. Alesina, Alberto F & Grilli, Vittorio & Milesi-Ferretti, Gian Maria, 1993. "The Political Economy of Capital Controls," CEPR Discussion Papers 793, C.E.P.R. Discussion Papers.
  6. Vittorio Grilli & Nouriel Roubini, 1990. "Financial Integration, Liquidity and Exchange Rates," Cowles Foundation Discussion Papers 939, Cowles Foundation for Research in Economics, Yale University.
  7. Axel Dreher & Lars Siemers, 2005. "The Intriguing Nexus between Corruption and Capital Account Restrictions," KOF Working papers 05-113, KOF Swiss Economic Institute, ETH Zurich.
  8. John T. Cuddington & Hong Liang & Shihua Lu, 1996. "Uncertainty, Trade, and Capital Flows in Sub-Saharan Africa," International Finance 9602002, EconWPA.
  9. Huizinga, H.P., 1996. "The Taxation Implicit in Two-Tiered Exchange Rate Systems," Discussion Paper 1996-100, Tilburg University, Center for Economic Research.
  10. Daniele Checchi, 1992. "What are the Real Effects of Liberalizing International Capital Movements?," Open Economies Review, Springer, vol. 3(1), pages 83-125, February.
  11. Svensson, Lars E O, 1988. "Trade in Risky Assets," American Economic Review, American Economic Association, vol. 78(3), pages 375-94, June.
  12. Alberto Giovannini, 1987. "International Capital Mobility and Tax Evasion," NBER Working Papers 2460, National Bureau of Economic Research, Inc.
  13. Alberto Giovannini & Jan Won Park, 1989. "Capital Controls and International Trade Finance," NBER Working Papers 3112, National Bureau of Economic Research, Inc.
  14. Deergha Raj Adhikari, 2006. "Is capital really mobile across the border?," Applied Economics Letters, Taylor and Francis Journals, vol. 13(8), pages 489-492.
  15. Makris, Miltiadis, 2001. "Necessary conditions for infinite-horizon discounted two-stage optimal control problems," Journal of Economic Dynamics and Control, Elsevier, vol. 25(12), pages 1935-1950, December.

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