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Exchange Controls, Capital Controls, and International Financial Markets

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  • Alan C. Stockman
  • Alejandro Hernandez D.

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.

Suggested Citation

  • Alan C. Stockman & Alejandro Hernandez D., 1985. "Exchange Controls, Capital Controls, and International Financial Markets," NBER Working Papers 1755, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1755
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    Cited by:

    1. Ghosh, Atish R. & Ostry, Jonathan D. & Qureshi, Mahvash S., 2018. "Taming the Tide of Capital Flows: A Policy Guide," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262037165, December.
    2. Ellyne, Mark & Chater, Rachel, 2013. "Exchange Controls and SADC Regional Integration: Measuring SADC Restrictiveness," MPRA Paper 58649, University Library of Munich, Germany.
    3. Axel Dreher & Lars-H.R. Siemers, 2003. "The Intriguing Nexus Between Corruption and Capital Account Restrictions," Development and Comp Systems 0306004, University Library of Munich, Germany, revised 07 Jul 2005.
    4. Alberto Alesina & Vittorio Grilli & Gian Maria Milesi-Ferretti, 1993. "The Political Economy of Capital Controls," NBER Working Papers 4353, National Bureau of Economic Research, Inc.
    5. Keskinsoy, Bilal, 2017. "Lucas Paradox in The Long Run," MPRA Paper 78126, University Library of Munich, Germany.
    6. Cuddington, John T & Liang, Hong & Lu, Shihua, 1996. "Uncertainty, Trade, and Capital Flows in Sub-Saharan Africa," Journal of African Economies, Centre for the Study of African Economies, vol. 5(3), pages 192-224, October.
    7. Deergha Raj Adhikari, 2006. "Is capital really mobile across the border?," Applied Economics Letters, Taylor & Francis Journals, vol. 13(8), pages 489-492.
    8. Salvador Valdés, 1989. "Control de Cambios en Países en Desarrollo," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 26(77), pages 115-144.
    9. Marvin Goodfriend & Robert G. King, 2001. "The case for price stability," Working Paper 01-02, Federal Reserve Bank of Richmond.
    10. Ellyne, Mark & Chater, Rachel, 2013. "Exchange Control and SADC Regional Integration," MPRA Paper 46648, University Library of Munich, Germany.
    11. Leiderman, Leonardo, 1989. "Economic Adjustment and Exchange Rates in LDCs a Review Essay," Foerder Institute for Economic Research Working Papers 275465, Tel-Aviv University > Foerder Institute for Economic Research.
    12. Alberto Giovannini & Jan Won Park, 1989. "Capital Controls and International Trade Finance," NBER Working Papers 3112, National Bureau of Economic Research, Inc.
    13. Axel Dreher & Lars-H. Siemers, 2009. "The nexus between corruption and capital account restrictions," Public Choice, Springer, vol. 140(1), pages 245-265, July.
    14. Ho, Wai-Ming, 1995. "Foreign exchange controls and liquidity," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 515-538, August.
    15. Vittorio Grilli & Nouriel Roubini, 1989. "Financial Integration, Liquidity and Exchange Rates," NBER Working Papers 3088, National Bureau of Economic Research, Inc.
    16. Daniele Checchi, 1992. "What are the Real Effects of Liberalizing International Capital Movements?," Open Economies Review, Springer, vol. 3(1), pages 83-125, February.
    17. Svensson, Lars E O, 1988. "Trade in Risky Assets," American Economic Review, American Economic Association, vol. 78(3), pages 375-394, June.
    18. Barari, Mahua, 1992. "Asset markets, stochastic policy and international trade," ISU General Staff Papers 1992010108000010972, Iowa State University, Department of Economics.
    19. Cardenas, Mauricio & Barrera, Felipe, 1997. "On the effectiveness of capital controls: The experience of Colombia during the 1990s," Journal of Development Economics, Elsevier, vol. 54(1), pages 27-57, October.
    20. Frenkel, Jacob A. & Razin, Assaf, 1989. "Exchange-rate management viewed as tax policies," European Economic Review, Elsevier, vol. 33(4), pages 761-781, April.
    21. Huizinga, H.P., 1996. "The Taxation Implicit in Two-Tiered Exchange Rate Systems," Other publications TiSEM e01fa769-96e8-4c5e-b9b5-a, Tilburg University, School of Economics and Management.
    22. Makris, Miltiadis, 2001. "Necessary conditions for infinite-horizon discounted two-stage optimal control problems," Journal of Economic Dynamics and Control, Elsevier, vol. 25(12), pages 1935-1950, December.
    23. Daniele Checchi, 1996. "Capital Controls And Conflict Of Interests," Economics and Politics, Wiley Blackwell, vol. 8(1), pages 33-50, March.
    24. Kathleen Dorsainvil, 2000. "Welfare effects of exchange controls: An application to the Haitian economy," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 6(3), pages 427-437, August.
    25. Alberto Giovannini, 1987. "International Capital Mobility and Tax Evasion," NBER Working Papers 2460, National Bureau of Economic Research, Inc.

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