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Capital Account Policies and the Real Exchange Rate

In: NBER International Seminar on Macroeconomics 2012

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  • Olivier Jeanne

Abstract

This paper presents a simple model of how a small open economy can undervalue its real exchange rate using its capital account policies. The paper presents several properties of such policies, and proposes a rule of thumb to assess their welfare cost. The model is applied to an analysis of Chinese capital account policies.

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This chapter was published in:

  • Francesco Giavazzi & Kenneth D. West, 2013. "NBER International Seminar on Macroeconomics 2012," NBER Books, National Bureau of Economic Research, Inc, number giav12-1, July.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12768.

    Handle: RePEc:nbr:nberch:12768

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    1. Disyatat, Piti & Galati, Gabriele, 2007. "The effectiveness of foreign exchange intervention in emerging market countries: Evidence from the Czech koruna," Journal of International Money and Finance, Elsevier, Elsevier, vol. 26(3), pages 383-402, April.
    2. Zheng Song & Kjetil Storesletten & Fabrizio Zilibotti, 2011. "Growing Like China," American Economic Review, American Economic Association, American Economic Association, vol. 101(1), pages 196-233, February.
    3. Chari, V V & Kehoe, Patrick J & McGrattan, Ellen R, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 69(3), pages 533-63, July.
    4. Sarno, Lucio & Taylor, Mark P, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective, and, If So, How Does It Work?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2690, C.E.P.R. Discussion Papers.
    5. Bianchi, Javier, 2009. "Overborrowing and Systemic Externalities in the Business Cycle," MPRA Paper 15114, University Library of Munich, Germany.
    6. Guonan Ma & RobertN McCauley, 2008. "Efficacy Of China'S Capital Controls: Evidence From Price And Flow Data," Pacific Economic Review, Wiley Blackwell, Wiley Blackwell, vol. 13(1), pages 104-123, 02.
    7. Damiano Sandri, 2014. "Growth and Capital Flows with Risky Entrepreneurship," American Economic Journal: Macroeconomics, American Economic Association, American Economic Association, vol. 6(3), pages 102-23, July.
    8. Marcos Chamon & Eswar Prasad, 2008. "Why are Saving Rates of Urban Households in China Rising?," NBER Working Papers 14546, National Bureau of Economic Research, Inc.
    9. Anton Korinek, 2011. "The New Economics of Prudential Capital Controls: A Research Agenda," IMF Economic Review, Palgrave Macmillan, Palgrave Macmillan, vol. 59(3), pages 523-561, August.
    10. Marco E. Terrones & Enrique G. Mendoza & Ceyhun Bora Durdu, 2008. "Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Mercantilism," 2008 Meeting Papers 56, Society for Economic Dynamics.
    11. Carroll, Christopher D & Jeanne, Olivier, 2009. "A Tractable Model of Precautionary Reserves, Net Foreign Assets, or Sovereign Wealth Funds," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7449, C.E.P.R. Discussion Papers.
    12. Joshua Aizenman & Jaewoo Lee, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," NBER Working Papers 11366, National Bureau of Economic Research, Inc.
    13. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 34(2), pages 647-668, June.
    14. David K. Backus & Patrick J. Kehoe, 1988. "On the denomination of government debt: a critique of the portfolio balance approach," Staff Report, Federal Reserve Bank of Minneapolis 116, Federal Reserve Bank of Minneapolis.
    15. Mark Aguiar & Manuel Amador, 2009. "Growth in the Shadow of Expropriation," NBER Working Papers 15194, National Bureau of Economic Research, Inc.
    16. Sebastian Edwards, 1985. "On the Interest Rate Elasticity of the Demand for International Reserves: Some Evidence from Developing Coutries," NBER Working Papers 1532, National Bureau of Economic Research, Inc.
    17. International Monetary Fund, 2011. "Foreign Exchange Intervention," IMF Working Papers 11/165, International Monetary Fund.
    18. Maurice Obstfeld & Kenneth S. Rogoff, 2005. "Global Current Account Imbalances and Exchange Rate Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(1), pages 67-146.
    19. Olivier Jeanne & Arvind Subramanian & John Williamson, 2012. "Who Needs to Open the Capital Account?," Peterson Institute Press: All Books, Peterson Institute for International Economics, Peterson Institute for International Economics, number 5119, July.
    20. Kumhof, Michael, 2010. "On the theory of sterilized foreign exchange intervention," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 34(8), pages 1403-1420, August.
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    Cited by:
    1. Dennis Reinhardt & Luca Antonio Ricci & Thierry Tressel, 2012. "International Capital Flows and Development - Financial Openness Matters," IHEID Working Papers, Economics Section, The Graduate Institute of International Studies 11-2012, Economics Section, The Graduate Institute of International Studies.
    2. Benigno, Gianluca & Fornaro, Luca, 2013. "The Financial Resource Curse," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9489, C.E.P.R. Discussion Papers.
    3. Bénassy-Quéré, Agnès & Carton, Benjamin & Gauvin, Ludovic, 2013. "China and global rebalancing: A two-country approach," China Economic Review, Elsevier, Elsevier, vol. 26(C), pages 118-139.
    4. Jinjarak, Yothin & Noy, Ilan & Zheng, Huanhuan, 2013. "What Lessons Can Asia Draw from Capital Controls in Brazil during 2008–2012?," ADBI Working Papers, Asian Development Bank Institute 423, Asian Development Bank Institute.
    5. Yothin Jinjarak & Ilan Noy & Huanhuan Zheng, 2013. "Capital Controls in Brazil – Stemming a Tide with a Signal?," NBER Working Papers 19205, National Bureau of Economic Research, Inc.
    6. Bacchetta, Philippe & Benhima, Kenza & Kalantzis, Yannick, 2013. "Optimal Exchange Rate Policy in a Growing Semi-Open Economy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9666, C.E.P.R. Discussion Papers.
    7. Carmen M. Reinhart & Takeshi Tashiro, 2013. "Crowding Out Redefined: The Role of Reserve Accumulation," NBER Working Papers 19652, National Bureau of Economic Research, Inc.
    8. Bonatti, Luigi & Fracasso, Andrea, 2014. "Modeling the Transition Towards Renminbi's Full Convertibility: Implications for China’s Growth," MPRA Paper 54129, University Library of Munich, Germany.

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