How do Capital Controls Affect the Transmission of Foreign Shocks?
AbstractThis paper studies the short-run transmission of foreign shocks in a small open economy with capital controls and a fixed exchange rate. Capital controls alter the transmission of shocks because endogenous changes in the domestic nominal interest rate affect savings and investment decisions. The economy's reaction to export shocks hinges on how the government chooses to restrict capital flows; that is, whether inflows or outflows are restricted. For foreign interest rate shocks, private capital flows are important, but so are the government's holdings of foreign exchange reserves. Finally, a simple graphical apparatus is developed to provide a contrast to the case when capital flows are unrestricted.
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Bibliographic InfoPaper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 07-02.
Length: 20 pages
Date of creation: Apr 2007
Date of revision:
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capital controls; foreign shocks;
Find related papers by JEL classification:
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-05-04 (All new papers)
- NEP-CBA-2007-05-04 (Central Banking)
- NEP-DGE-2007-05-04 (Dynamic General Equilibrium)
- NEP-IFN-2007-05-04 (International Finance)
- NEP-MAC-2007-05-04 (Macroeconomics)
- NEP-MON-2007-05-04 (Monetary Economics)
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