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An Investigation in the Theory of Foreign Exchange Controls

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  • Jeremy Greenwood
  • Kent P. Kimbrough

Abstract

A choice-theoretic, cash-in-advance model is constructed to examine foreign-exchange controls. While foreign-exchange controls improve the trade balance and the balance-of-payments (or exchange rate) they reduce welfare for a distortion-free, small, open economy. This is because foreign-exchange controls essentially place a quota on imports. Shocks to the terms-of-trade are shown to be transmitted negatively to the domestic economy when exchange controls are in effect. Devaluations are found not to have real effects. Finally, it is argued that foreign-exchange controls are not the optimal policy for attaining trade-balance objectives.

Suggested Citation

  • Jeremy Greenwood & Kent P. Kimbrough, 1987. "An Investigation in the Theory of Foreign Exchange Controls," Canadian Journal of Economics, Canadian Economics Association, vol. 20(2), pages 271-288, May.
    • Handle: RePEc:cje:issued:v:20:y:1987:i:2:p:271-88
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    Cited by:

    1. Joshua Aizenman, 1986. "On the Complementarity of Commercial Policy, Capital Controls, and Inflation Tax," Canadian Journal of Economics, Canadian Economics Association, vol. 19(1), pages 114-133, February.
    2. Ellyne, Mark & Chater, Rachel, 2013. "Exchange Controls and SADC Regional Integration: Measuring SADC Restrictiveness," MPRA Paper 58649, University Library of Munich, Germany.
    3. Ellyne, Mark & Chater, Rachel, 2013. "Exchange Control and SADC Regional Integration," MPRA Paper 46648, University Library of Munich, Germany.
    4. Ho, Wai-Ming, 1995. "Foreign exchange controls and liquidity," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 515-538, August.
    5. Vittorio Grilli & Nouriel Roubini, 1989. "Financial Integration, Liquidity and Exchange Rates," NBER Working Papers 3088, National Bureau of Economic Research, Inc.
    6. 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.
    7. Huizinga, H.P., 1996. "The Taxation Implicit in Two-Tiered Exchange Rate Systems," Other publications TiSEM e01fa769-96e8-4c5e-b9b5-a, Tilburg University, School of Economics and Management.
    8. Ogbulu, Onyemachi Maxwell & Torbira, Lezaasi Lenee, 2017. "Transmission Effect of the Interaction between Parallel and Official Foreign Exchange Markets in Nigeria," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 3(6), pages 76-90, 06-2017.
    9. Ronald W. Jones, 1995. "The Discipline of International Trade," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 131(III), pages 273-288, September.
    10. Alberto Giovannini, 1987. "International Capital Mobility and Tax Evasion," NBER Working Papers 2460, National Bureau of Economic Research, Inc.
    11. Jacob A. Frenkel & Assaf Razin, 1986. "The Limited Viability of Dual Exchange-Rate Regimes," NBER Working Papers 1902, National Bureau of Economic Research, Inc.

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