Exchange Controls, Capital Controls, and International Financial Markets
AbstractThis 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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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1755.
Date of creation: Oct 1985
Date of revision:
Publication status: published as The American Economic Review, Vol. 78, No. 3, pp. 362-374, (June 1988).
Note: ITI IFM
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- Stockman, Alan C & Hernandez D, Alejandro, 1988. "Exchange Controls, Capital Controls, and International Financial Markets," American Economic Review, American Economic Association, vol. 78(3), pages 362-74, June.
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