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Exchange Controls, Capital Controls, and International Financial Markets

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Author Info
Alan C. Stockman
Alejandro Hernandez D.

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Abstract

This paper examines the effects of restrictions on international financial markets. We analyze a general equilibrium, rational expectations model of a two-country world in which well-functioning international financial markets premit trade in all state-contingent securities except insofar as governments restrict these markets. The restrictions we examine take the form of taxes or quantitative controls on purchases of foreign currency and on the income from foreign assets. State-contingent financial markets allow households to allocate wealth optimally across states so that the imposition of exchange and capital controls has, roughly speaking, only substitution effects but no wealth effect. These restrictions reduce international trade in goods and lower ex-post welfare in the country in which they are imposed. Nominal prices and exchange rate are nonmonotonic functions of these restrictions.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1755.

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Date of creation: Feb 1989
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Handle: RePEc:nbr:nberwo:1755

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References listed on IDEAS
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. Adams, Charles & Greenwood, Jeremy, 1985. "Dual exchange rate systems and capital controls: An investigation," Journal of International Economics, Elsevier, vol. 18(1-2), pages 43-63, February. [Downloadable!] (restricted)
  2. Cooley, Thomas F & LeRoy, Stephen F & Raymon, Neil, 1984. "Econometric Policy Evaluation: Note," American Economic Review, American Economic Association, vol. 74(3), pages 467-70, June. [Downloadable!] (restricted)
  3. Branson, William H. & Henderson, Dale W., 1985. "The specification and influence of asset markets," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 15, pages 749-805 Elsevier. [Downloadable!] (restricted)
  4. Robert E. Cumby, 1984. "Monetary Policy Under Dual Exchange Rates," NBER Working Papers 1424, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Alan C. Stockman & Lars E.O. Svensson, 1987. "Capital Flows, Investment, and Exchange Rates," NBER Working Papers 1598, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November. [Downloadable!] (restricted)
  7. Svensson, Lars E. O., 1985. "Currency prices, terms of trade, and interest rates: A general equilibrium asset-pricing cash-in-advance approach," Journal of International Economics, Elsevier, vol. 18(1-2), pages 17-41, February. [Downloadable!] (restricted)
  8. Stockman, Alan C, 1980. "A Theory of Exchange Rate Determination," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 673-98, August. [Downloadable!] (restricted)
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  9. Persson, Torsten, 1984. "Real transfers in fixed exchange rate systems and the international adjustment mechanism," Journal of Monetary Economics, Elsevier, vol. 13(3), pages 349-369, May. [Downloadable!] (restricted)
  10. Sargent, Thomas J, 1984. "Autoregressions, Expectations, and Advice," American Economic Review, American Economic Association, vol. 74(2), pages 408-15, May. [Downloadable!] (restricted)
  11. Maurice Obstfeld, 1986. "Capital Controls, The Dual Exchange Rate, and Devaluation," NBER Working Papers 1324, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. 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)
  13. Cumby, Robert E., 1984. "Monetary policy under dual exchange rates," Journal of International Money and Finance, Elsevier, vol. 3(2), pages 195-208, August. [Downloadable!] (restricted)
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Cited by:
(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. Salvador Valdés, 1989. "Control de Cambios en Países en Desarrollo," Cuadernos de Economía (Latin American Journal of Economics), Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 26(77), pages 115-144. [Downloadable!]
  2. Marvin Goodfriend & Robert G. King, 2001. "The case for price stability," Working Paper 01-02, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
  3. Vittorio Grilli & Nouriel Roubini, 1990. "Financial Integration, Liquidity and Exchange Rates," Cowles Foundation Discussion Papers 939, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  4. Alberto Alesina & Vittorio Grilli & Gian Maria Milesi-Ferrett, 1993. "The Political Economy of Capital Controls," NBER Working Papers 4353, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Axel Dreher & Lars Siemers, 2005. "The Intriguing Nexus between Corruption and Capital Account Restrictions," KOF Working papers 05-113, KOF Swiss Economic Institute, ETH Zurich. [Downloadable!]
    Other versions:
  6. John T. Cuddington & Hong Liang & Shihua Lu, 1996. "Uncertainty, Trade, and Capital Flows in Sub-Saharan Africa," International Finance 9602002, EconWPA. [Downloadable!]
  7. Huizinga, H., 1996. "The taxation implicit in two-tiered exchange rate systems," Discussion Paper 100, Tilburg University, Center for Economic Research. [Downloadable!]
  8. Daniele Checchi, 1992. "What are the Real Effects of Liberalizing International Capital Movements?," Open Economies Review, Springer, vol. 3(1), pages 83-125, February. [Downloadable!] (restricted)
  9. Alberto Giovannini, 1987. "International Capital Mobility and Tax Evasion," NBER Working Papers 2460, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Alberto Giovannini & Jan Won Park, 1989. "Capital Controls and International Trade Finance," NBER Working Papers 3112, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Lars E.O. Svensson, 1989. "Trade in Risky Assets," NBER Working Papers 2403, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  12. Deergha Raj Adhikari, 2006. "Is capital really mobile across the border?," Applied Economics Letters, Taylor and Francis Journals, vol. 13(8), pages 489-492, June. [Downloadable!] (restricted)
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