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Capital Mobility and Exchange Market Intervention in Developing Countries

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  • Liliana Rojas-Suárez
  • Donald J. Mathieson
  • Michael P. Dooley

Abstract

This paper develops a new technique for measuring changes in the degree of capital mobility confronting a developing country that has restrictions on capital flows and official ceilings on domestic interest rates. Because such official controls rule out the use of traditional interest rate parity conditions to measure changes in the degree of capital mobility, the analysis first examines an intertemporal model of an open economy. This model describes the linkages between the cost of undertaking disguised capital flows, the current account, capital controls, domestic and external financial market conditions, and the authorities' foreign exchange market interventions. The model suggests a means of measuring changes in the cost of undertaking disguised capital flows, based on the past history of differentials between external interest rates (adjusted for exchange rate changes) and domestic ceiling interest rates, provided that the authorities' foreign exchange market activities are incorporated into the analysis. Parameter estimates for Korea, Mexico, and the Philippines indicate that the real cost of undertaking disguised capital flows declined on average by nearly 70 percent between the early 1970s and the late 1980s.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 96/131.

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Date of creation: 01 Nov 1996
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Handle: RePEc:imf:imfwpa:96/131

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References

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  1. Liliana Rojas-Suárez & Donald J. Mathieson, 1993. "Liberalization of the Capital Account: Experiences and Issues," IMF Occasional Papers 103, International Monetary Fund.
  2. Liliana Rojas-Suárez, 1992. "Currency Substitution and Inflation in Peru," IMF Working Papers 92/33, International Monetary Fund.
  3. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1993. "“Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," MPRA Paper 7125, University Library of Munich, Germany.
  4. McNelis, Paul D & Neftci, Salih N, 1982. "Policy-Dependent Parameters in the Presence of Optimal Learning: An Application of Kalman Filtering to the Fair and Sargent Supply-Side Equations," The Review of Economics and Statistics, MIT Press, vol. 64(2), pages 296-306, May.
  5. Lawrence H. Summers, 1989. "Tax Policy and International Competitiveness," NBER Working Papers 2007, National Bureau of Economic Research, Inc.
  6. Wickens, Michael R, 1982. "The Efficient Estimation of Econometric Models with Rational Expectations," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 55-67, January.
  7. International Monetary Fund, 1990. "Capital Mobility in Developing Countries - Some Empirical Tests," IMF Working Papers 90/117, International Monetary Fund.
  8. Harvey,Andrew C., 1990. "Forecasting, Structural Time Series Models and the Kalman Filter," Cambridge Books, Cambridge University Press, number 9780521321969.
  9. John F. O. Bilson & Richard C. Marston, 1984. "Exchange Rate Theory and Practice," NBER Books, National Bureau of Economic Research, Inc, number bils84-1, October.
  10. Montiel, Peter J., 1993. "Capital mobility in developing countries : some measurement issues and empirical estimates," Policy Research Working Paper Series 1103, The World Bank.
  11. Michael P. Dooley & Donald J. Mathieson, 1992. "Exchange rate policy, international capital mobility and monetary policy instruments," Proceedings, Federal Reserve Bank of San Francisco, pages 68-95.
  12. Michael Dooley & Jeffrey Frankel & Donald J. Mathieson, 1987. "International Capital Mobility: What Do Saving-Investment Correlations Tell Us?," IMF Staff Papers, Palgrave Macmillan, vol. 34(3), pages 503-530, September.
  13. Helmut Reisen & Hélène Yèches, 1991. "Time-Varying Estimates on the Openness of the Capital Account in Korea and Taiwan," OECD Development Centre Working Papers 42, OECD Publishing.
  14. 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.
  15. Leiderman,Leonardo & Razin,Assaf (ed.), 1994. "Capital Mobility," Cambridge Books, Cambridge University Press, number 9780521454384.
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Citations

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Cited by:
  1. Sebastian Edwards, 2005. "Capital Controls, Sudden Stops and Current Account Reversals," NBER Working Papers 11170, National Bureau of Economic Research, Inc.
  2. Christopher J. Neely, 2001. "The practice of central bank intervention: looking under the hood," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-10.
  3. Sebastian Edwards, 2001. "Capital Mobility and Economic Performance: Are Emerging Economies Different?," NBER Working Papers 8076, National Bureau of Economic Research, Inc.
  4. Sebastian Edwards, 1998. "Interest Rate Volatily, Contagion and Convergence: And Empirical Investigation of the Cases of Argentina, Chile and México," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 55-86, November.
  5. Sebastian Edwards, 1998. "Interest Rate Volatility, Capital Controls, and Contagion," NBER Working Papers 6756, National Bureau of Economic Research, Inc.
  6. Sebastian Edwards, 1999. "How Effective are Capital Controls?," NBER Working Papers 7413, National Bureau of Economic Research, Inc.
  7. Dilip K. Das, 2001. "Stimulants to capital inflows into emerging markets and the recent role of speculators," Journal of International Development, John Wiley & Sons, Ltd., vol. 13(1), pages 25-44.
  8. Buch, Claudia M. & Heinrich, Ralph P. & Pierdzioch, Christian, 2001. "Globalisierung der Finanzmärkte: Freier Kapitalverkehr oder Tobin-Steuer?," Kiel Discussion Papers 381, Kiel Institute for the World Economy (IfW).
  9. Víctor-Hugo Alcalá Ríos & Manuel Gómez Zaldívar & Daniel Ventosa-Santaulària, 2011. "Paradoja Feldstein-Horioka: el caso de México (1950-2007)," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 26(2), pages 293-313.
  10. repec:fip:fedlre:y:2001:i:may:p:1-10:n:v.83no.3 is not listed on IDEAS

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