Capital controls, the dual exchange rate, and devaluation
AbstractThis paper re-examines the effect of devaluation under capital-account restrictions, adding to traditional formulations the seemingly minor (but realistic) assumption that central-bank reserves earn interest. The extra assumption has important implications. In an intertemporal model, devaluation is no longer neutral in the long run as it is in the literature on the monetary approach to the balance of payments. Further, the economy may possess multiple stationary states, some of them unstable.The analysis confirms, however, that even large devaluations must improve the balance of payments if the economy is initially at a stable stationary position. A by-product of the analysis is a pricing formula for the financial exchange rate in a dual exchange rate system. That formula is consistent with recent consumption-based models of asset pricing.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Economics.
Volume (Year): 20 (1986)
Issue (Month): 1-2 (February)
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Web page: http://www.elsevier.com/locate/inca/505552
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- Maurice Obstfeld, 1986. "Capital Controls, The Dual Exchange Rate, and Devaluation," NBER Working Papers 1324, National Bureau of Economic Research, Inc.
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