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When liberal policies reflect external shocks, what do we learn?

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Author Info
Leonardo Bartolini
Allan Drazen

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Abstract

We present a model where policies of free capital mobility can signal governments' future policies, but the informativeness of the signal depends on the path of world interest rates. Capital flows to "emerging markets" reflect investors' perception of these markets' political risk. With low world interest rates, emerging markets experience a capital inflow and engage in a widespread policy of free capital mobility, whereas others impose controls to trap capital onshore, thus signaling future policies affecting capital mobility. These predictions are consistent with the recent experience of capital flows and policies affecting capital mobility in developing countries.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 18.

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Date of creation: 1996
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Publication status: Published in Journal of International Economics 42, nos. 3-4 (May 1997): 249-73
Handle: RePEc:fip:fednsr:18

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Keywords: Capital movements Monetary policy

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Bacchetta, Philippe, 1992. "Liberalization of Capital Movements and of the Domestic Financial System," Economica, London School of Economics and Political Science, vol. 59(236), pages 465-74, November. [Downloadable!] (restricted)
  2. Paul R. Masson & Allan Drazen, 1994. "Credibility of Policies Versus Credibility of Policymakers," IMF Working Papers 94/49, International Monetary Fund.
    Other versions:
  3. Gian Maria Milesi-Ferretti & Vittorio Grilli, 1995. "Economic Effects and Structural Determinants of Capital Controls," IMF Working Papers 95/31, International Monetary Fund.
  4. Maurice Obstfeld, 1987. "Capital Flows, the Current Account, and the Real Exchange Rate: Consequences of Liberalization and Stabilization," NBER Working Papers 1526, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Calvo, Sara & Reinhart, Carmen, 1996. "Capital flows to Latin America : Is there evidence of contagion effects?," Policy Research Working Paper Series 1619, The World Bank. [Downloadable!]
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  6. Rogoff, Kenneth, 1987. "Reputational constraints on monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 26(1), pages 141-181, January. [Downloadable!] (restricted)
  7. Kenneth Rogoff, 1987. "Reputational Constraints on Monetary Policy," NBER Working Papers 1986, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Reuven Glick & Xueyan Guo & Michael Hutchison, 2004. "Currency Crises, Capital Account Liberalization, and Selection Bias," Santa Cruz Department of Economics, Working Paper Series 1008, Department of Economics, UC Santa Cruz. [Downloadable!]
    Other versions:
  2. Philippe Bacchetta & Eric van Wincoop, 1998. "Capital Flows to Emerging Markets: Liberalization, Overshooting, and Volatility," NBER Working Papers 6530, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Helge Berger & Jan-Egbert Sturm & Jakob de Haan, 2001. "Capital Controls and Exchange Rate Regimes: An Empirical Investigation," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  4. Ashoka Mody & Abdul Abiad, 2003. "Financial Reform: What Shakes It? What Shapes It?," IMF Working Papers 03/70, International Monetary Fund. [Downloadable!]
  5. Stefano Battilossi, 2003. "Capital Mobility And Financial Repression In Italy, 1960-1990: A Public Finance Perspective," Working Papers in Economic History wh030602, Universidad Carlos III, Departamento de Historia Económica e Instituciones. [Downloadable!]
  6. Reuven Glick & Michael Hutchison, 2002. "Capital controls and exchange rate instability in developing economies," Pacific Basin Working Paper Series 00-05, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  7. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 1999. "Capital Markets and the Instability of Open Economies," CEPR Discussion Papers 2083, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  8. Abdul Abiad & Ashoka Mody, 2005. "Financial Reform: What Shakes It? What Shapes It?," American Economic Review, American Economic Association, vol. 95(1), pages 66-88, March. [Downloadable!] (restricted)
  9. Angelos Antzoulatos & Simone Peart, 1998. "Import demand under a foreign exchange constraint," Research Paper 9810, Federal Reserve Bank of New York. [Downloadable!]
  10. Roni Frish, 2007. "Restricting capital outflow," Economics of Governance, Springer, vol. 8(2), pages 153-177, February. [Downloadable!] (restricted)
  11. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 2004. "Financial Development and the Instability of Open Economies," NBER Working Papers 10246, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Reuven Glick & Michael Hutchison, . "Stopping "Hot Money" or Signaling Bad Policy? Capital Controls and the Onset of Currency Crises," EPRU Working Paper Series 00-14, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
  13. Sweta Saxena & Kar-yiu Wong, 1999. "Currency Crises and Capital Control: A Survey," Discussion Papers in Economics at the University of Washington 0045, Department of Economics at the University of Washington. [Downloadable!]
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  14. Bernardo S. de M. Carvalho & Márcio G. P. Garcia, 2006. "Ineffective Controls On Capital Inflows Under Sophisticated Financial Markets: Brazil In The Nineties," Anais do XXXIV Encontro Nacional de Economia [Proceedings of the 34th Brazilian Economics Meeting] 58, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
    Other versions:
  15. Hans-Joachim Voth, 2003. "Convertibility, currency controls and the cost of capital in Western Europe, 1950-1999," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(3), pages 255-276. [Downloadable!]
    Other versions:
  16. Jose De Gregorio & Sebastian Edwards & Rodrigo O. Valdes, 2000. "Controls on Capital Inflows: Do they Work?," NBER Working Papers 7645, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  17. Jane Sneddon Little & Giovanni P. Olivei, 1999. "Why the interest in reforming the International Monetary System?," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 53-84. [Downloadable!]
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