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Capital controls and the political discount: The Spanish experience in the late 1980s

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  • Philippe Bacchetta

Abstract

This article examines the wedge between Madrid and London peseta interest rates in the late 1980s, when controls on capital inflows were imposed. A model of onshore and offshore markets and of arbitrage between the two is proposed, where arbitrage has a dynamic structure caused by the process of controls avoidance. The model implies, first, that the wedge can follow an ARMA process and, second, that onshore and offshore rates can be cointegrated and can adjust according to an error correction mechanism. These models are consistent with the data and show that the monetary independence given by the controls was limited. Copyright Kluwer Academic Publishers 1996

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File URL: http://hdl.handle.net/10.1007/BF01886369
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 7 (1996)
Issue (Month): 4 (October)
Pages: 349-369

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Handle: RePEc:kap:openec:v:7:y:1996:i:4:p:349-369

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: capital controls; country premium; F32; F36;

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  1. Giovannini, Alberto & Park, Jae Won, 1992. "Capital controls and international trade finance," Journal of International Economics, Elsevier, vol. 33(3-4), pages 285-304, November.
  2. Daniel Gros, 1987. "The Effectiveness of Capital Controls: Implications for Monetary Autonomy in the Presence of Incomplete Market Separation," IMF Staff Papers, Palgrave Macmillan, vol. 34(4), pages 621-642, December.
  3. Dellas, Harris & Stockman, Alan, 1993. "Self-Fulfilling Expectations, Speculative Attack, and Capital Controls," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(4), pages 721-30, November.
  4. Aliber, Robert Z, 1973. "The Interest Rate Parity Theorem: A Reinterpretation," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1451-59, Nov.-Dec..
  5. Obstfeld, Maurice, 1986. "Rational and Self-fulfilling Balance-of-Payments Crises," American Economic Review, American Economic Association, vol. 76(1), pages 72-81, March.
  6. Melvin, Michael & Schlagenhauf, Don, 1985. "A Country Risk Index: Econometric Formulation and an Application to Mexico," Economic Inquiry, Western Economic Association International, vol. 23(4), pages 601-19, October.
  7. Bacchetta, Philippe, 1990. "Temporary capital controls in a balance-of- payments crisis," Journal of International Money and Finance, Elsevier, vol. 9(3), pages 246-257, September.
  8. Swanson, Peggy E., 1987. "Capital market integration over the past decade: The case of the US dollar," Journal of International Money and Finance, Elsevier, vol. 6(2), pages 215-225, June.
  9. Barry Eichengreen & Charles Wyplosz, 1993. "The Unstable EMS," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 51-144.
  10. Lam, Swee-Sum & Pak, Hoe-Soon, 1993. "A note on capital market segmentation: new tests and evidence," Pacific-Basin Finance Journal, Elsevier, vol. 1(3), pages 263-276, September.
  11. Phylaktis, Kate, 1988. "Capital controls: The case of Argentina," Journal of International Money and Finance, Elsevier, vol. 7(3), pages 303-320, September.
  12. Gros, Daniel, 1992. "Capital controls and foreign exchange market crises in the EMS," European Economic Review, Elsevier, vol. 36(8), pages 1533-1544, December.
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