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On the Complementarity of Commercial Policy, Capital Controls and Inflation Tax

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Joshua Aizenman

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Abstract

This paper studies the optimal use of distortive policies aimed at raising a given real revenue, in a general equilibrium framework in which lump-sum taxes are absent. The policies analyzed are an inflation tax,commercial policy, and an implicit tax on capital inflows implemented by capital controls. It is shown that we would tend to avoid activating an inflation tax for small revenue needs. Furthermore, if the policy target were allocative, we would tend to use only one policy instrument.Thus, each policy has its own comparative advantage, and their combined use is justified when the target is raising government revenue. As a by-product of the paper,we study the determinants of exchange rates, prices, and quantities in an economy subject to capital controls and commercial policy.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1583.

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Date of creation: Jul 1986
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Publication status: published as Canadian Journal of Economics, Vol. 19, No. 1, pp. 114-133, (February 1986)
Handle: RePEc:nbr:nberwo:1583

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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. Jeremy Greenwood & Kent P. Kimbrough, 1987. "An Investigation in the Theory of Foreign Exchange Controls," Canadian Journal of Economics, Canadian Economics Association, vol. 20(2), pages 271-88, May. [Downloadable!] (restricted)
  2. Greenwood, Jeremy, 1983. "Expectations, the exchange rate, and the current account," Journal of Monetary Economics, Elsevier, vol. 12(4), pages 543-569, November. [Downloadable!] (restricted)
  3. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 865-90, October. [Downloadable!] (restricted)
  4. Aizenman, Joshua, 1983. "A theory of current account and exchange rate determinations," European Economic Review, Elsevier, vol. 23(3), pages 261-280, September. [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. Daekuen Park & Jeffrey Sachs, 1987. "Capital Controls and the Timing of Exchange Regime Collapse," NBER Working Papers 2250, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Huizinga, H., 1996. "The taxation implicit in two-tiered exchange rate systems," Discussion Paper 100, Tilburg University, Center for Economic Research. [Downloadable!]
  3. 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)
  4. Pinto, Brian, 1988. "Black markets for foreign exchange, real exchange rates, and inflation : overnight versus gradual reform in sub-Saharan Africa," Policy Research Working Paper Series 84, The World Bank. [Downloadable!]
  5. Alberto Giovannini, 1987. "International Capital Mobility and Tax Evasion," NBER Working Papers 2460, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Goldberg, L.S., 1992. "Exchange-rate Unification with Black Market Leakages: Russia 1992," Working Papers 92-56, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  7. Sebastian Edwards & Jonathan Ostry, 1992. "Terms of Trade Disturbances, Real Exchange Rates and Welfare: The Role of Capital Controls and Labor Market Distortions," NBER Working Papers 2907, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Joshua Aizenman, 1989. "Country Risk, Asymmetric Information and Domestic Policies," NBER Working Papers 1880, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Joshua Aizenman, 1988. "Inflation, Tariffs and Tax Enforcement Costs," NBER Working Papers 1712, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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