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Capital Controls, The Dual Exchange Rate, and Devaluation

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Maurice Obstfeld

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Abstract

This paper re-examines the effect of devaluation under capital-account restrictions, adding to traditional formulations the seemingly minor (but realistic) assumption that central-bank reserves earn interest. The extra assumption has important implications. In an intertemporal model, devaluation is no longer neutral in the long run as it is in the literature on the monetary approach to the balance of payments. Further, the economy may possess multiple stationary states, some of them unstable.The analysis confirms, however, that even large devaluations must improve the balance of payments if the economy is initially at a stable stationary position. A by-product of the analysis is a pricing formula for the financial exchange rate in a dual exchange rate system. That formula is consistent with recent consumption-based models of asset pricing.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1324.

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Date of creation: Aug 1986
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Handle: RePEc:nbr:nberwo:1324

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  1. Goldberg, Linda S. & Karimov, Il'dar, 1991. "Internal Currency Markets and Production in the Soviet Union," Working Papers 91-03, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
    Other versions:
  2. Reinhart, Carmen & Calvo, Guillermo & Vegh, Carlos, 1994. "Targeting the real exchange rate: Theory and evidence," MPRA Paper 13412, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  3. Ricardo Hausmann, 1995. "Dealing with Negative Oil Shocks: The Venezuelan Experience in the Eighties," RES Working Papers 4010, Inter-American Development Bank, Research Department. [Downloadable!]
  4. Velasco, Andres, 1989. "Real Interest Rates And Government Debt During Stabilization," Working Papers 89-34, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  5. Ricardo Hausmann, 1995. "Manejo de sacudidas petroleras negativas: la experiencia venezolana en los años 80," RES Working Papers 4011, Inter-American Development Bank, Research Department. [Downloadable!]
  6. Nyarko, Yaw & Olson, Lars J., 1990. "Stochastic Dynamics Resources Models With Stock-Dependent Rewards," Working Papers 90-08, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  7. Alan C. Stockman & Alejandro Hernandez D., 1989. "Exchange Controls, Capital Controls, and International Financial Markets," NBER Working Papers 1755, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Jacob A. Frenkel & Assaf Razin, 1989. "Exchange-Rate Management Viewed as Tax Policies," NBER Working Papers 2653, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  9. Eran Yashiv, 1997. "Capital Controls as Taxation Policy," International Tax and Public Finance, Springer, vol. 4(3), pages 263-276, July. [Downloadable!] (restricted)
  10. Impavido, Gregorio & Musalem, Alberto R. & Vittas, Dimitri, 2002. "Contractual savings in countries with a small financial sector," Policy Research Working Paper Series 2841, The World Bank. [Downloadable!]
  11. Robert Flood & Nancy Marion, 1989. "Risk Neutrality and the Two-Tier Foreign Exchange Market: Evidence from Belgium," NBER Working Papers 3015, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Alberto Giovannini & Jan Won Park, 1989. "Capital Controls and International Trade Finance," NBER Working Papers 3112, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Velasco, Andres & Larrain, Felipe, 1989. "The Basic Macroeconomics Of Debt Swaps," Working Papers 89-31, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  14. Chetan Subramanian & Jungsoo Park, 2004. "Exchange Rate Based Stabilization with Sudden Restrictions on Capital Flows," Econometric Society 2004 Far Eastern Meetings 748, Econometric Society. [Downloadable!]
  15. Joshua Aizenman, 1989. "Country Risk, Asymmetric Information and Domestic Policies," NBER Working Papers 1880, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Kaufmann, Daniel & O'Connell, Stephen A., 1999. "The macroeconomics of delayed exchange-rate unification : theory and evidence from Tanzania," Policy Research Working Paper Series 2060, The World Bank. [Downloadable!]
  17. Daekeun Park & Jeffrey D. Sachs, 1996. "The Timing Of Exchange Regime Collapse Under Capital Controls," International Economic Journal, Korean International Economic Association, vol. 10(4), pages 123-141, December. [Downloadable!] (restricted)
  18. Jacob A. Frenkel & Assaf Razin, 1986. "The Limited Viability of Dual Exchange-Rate Regimes," NBER Working Papers 1902, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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