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Collateral Damage

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Author Info

  • Zhiwei Zhang
  • Shang-Jin Wei

Abstract

While new conventional wisdom warns that developing countries should be aware of the risks of premature capital account liberalization, the costs of not removing exchange controls have received much less attention. This paper investigates the negative effects of exchange controls on trade. To minimize evasion of controls, countries often intensify inspections at the border and increase documentation requirements. Thus, the cost of conducting trade rises. The paper finds that a one standard-deviation increase in the controls on trade payment has the same negative effect on trade as an increase in tariff by about 14 percentage points. A one standard-deviation increase in the controls on FX transactions reduces trade by the same amount as a rise in tariff by 11 percentage points. Therefore, the collateral damage in terms of foregone trade is sizable.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/8.

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Length: 27
Date of creation: 01 Jan 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/8

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Related research

Keywords: Capital controls; Capital account liberalization; exchange controls; foreign exchange; tariff barriers; non-tariff barriers; international trade; tariff rates; tariff rate; exchange control; bilateral imports; exchange rate; trade openness; trade flows; tariff barrier; exchange restrictions; import price; exchange transactions; trade volume; foreign exchange transactions; exchange rates; exchange arrangements; volume of trade; tariff equivalent; open economies; real exchange rate; export taxes; exchange rate policies; free trade; foreign exchange budget; exchange rate fluctuations; exchange rate regime; foreign exchange control; trading partner; trade areas; trading blocs; imported goods; bilateral real exchange rate; fixed exchange rate regime; trade data; trading partners; pattern of specialization; bilateral trade data; restriction ? index; trade opening; multiple exchange rates; multilateral real exchange rate; importing country; free trade areas; domestic demand; nontariff barrier; real exchange rates; tradable goods; tariff equivalents; free trade area; external trade; member country; bilateral trade; forward exchange; tariff lines; partner country; global integration; nontariff barriers; fixed exchange rate;

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References

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  1. Andrew K. Rose, 2002. "Do We Really Know that the WTO Increases Trade?," NBER Working Papers 9273, National Bureau of Economic Research, Inc.
  2. Forbes, Kristin J., 2007. "One cost of the Chilean capital controls: Increased financial constraints for smaller traded firms," Journal of International Economics, Elsevier, vol. 71(2), pages 294-323, April.
  3. James E. Anderson & Eric van Wincoop, 2000. "Gravity with Gravitas: A Solution to the Border Puzzle," Boston College Working Papers in Economics 485, Boston College Department of Economics.
  4. Shang-Jin Wei & Arvind Subramanian, 2003. "The WTO Promotes Trade, Strongly But Unevenly," IMF Working Papers 03/185, International Monetary Fund.
  5. M. Ayhan Kose & Eswar Prasad & Kenneth S. Rogoff & Shang-Jin Wei, 2006. "Financial Globalization: A Reappraisal," NBER Working Papers 12484, National Bureau of Economic Research, Inc.
  6. Aizenman, Joshua, 2008. "On the hidden links between financial and trade opening," Journal of International Money and Finance, Elsevier, vol. 27(3), pages 372-386, April.
  7. M. Ayhan Kose & Kenneth Rogoff & Eswar Prasad & Shang-Jin Wei, 2003. "Effects of Financial Globalization on Developing Countries," IMF Occasional Papers 220, International Monetary Fund.
  8. M. Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2006. "Financial Globalization," IMF Working Papers 06/189, International Monetary Fund.
  9. Jeffrey A. Frankel & Shang-Jin Wei, 1992. "Yen bloc or dollar bloc: exchange rate policies of the East Asian economies," Pacific Basin Working Paper Series 93-01, Federal Reserve Bank of San Francisco.
  10. Natalia T. Tamirisa, 1998. "Exchange and Capital Controls As Barriers to Trade," IMF Working Papers 98/81, International Monetary Fund.
  11. Jeffrey A. Frankel, 1997. "Regional Trading Blocs in the World Economic System," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 72.
  12. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2006. "Trading Partners and Trading Volumes," DEGIT Conference Papers c011_022, DEGIT, Dynamics, Economic Growth, and International Trade.
  13. Natalia T. Tamirisa & Simon Johnson & Kalpana Kochhar & Todd Mitton, 2006. "Malaysian Capital Controls," IMF Working Papers 06/51, International Monetary Fund.
  14. Simon Johnson & Kalpana Kochhar & Todd Mitton & Natalia Tamirisa, 2007. "Malaysian Capital Controls: Macroeconomics and Institutions," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 529-574 National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Eswar Prasad & Marco Terrones & M. Ayhan Kose, 2008. "Does Openness to International Financial Flows Raise Productivity Growth?," IMF Working Papers 08/242, International Monetary Fund.
  2. Azim M. Sadikov, 2007. "Border and Behind-The-Border Trade Barriers and Country Exports," IMF Working Papers 07/292, International Monetary Fund.
  3. Patnaik, Ila & Gupta, Abhijit Sen & Shah, Ajay, 2010. "Determinants of Trade Misinvoicing," Working Papers 10/75, National Institute of Public Finance and Policy.
  4. Vithessonthi, Chaiporn & Tongurai, Jittima, 2013. "Unremunerated reserve requirements, exchange rate volatility, and firm value," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 23(C), pages 358-378.
  5. Mitchener, Kris James & Wandschneider, Kirsten, 2013. "Capital Controls and Recovery from the Financial Crisis of the 1930s," CAGE Online Working Paper Series 132, Competitive Advantage in the Global Economy (CAGE).
  6. repec:cge:warwcg:131 is not listed on IDEAS

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