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Financial Repression and Capital Mobility: Why Capital Flows and Covered Interest Rate Differentials Fail to Measure Capital Market Integration

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  • Michael P. Dooley
  • Menzie Chinn

Abstract

Required reserves on banks' deposit liabilities have been utilized by both industrial and developing countries to discourage and sterilize international capital flows. In this paper we utilize an open economy macro model incorporating bank credit to evaluate this policy. The model suggests that high levels of reserve requirements are a perverse policy tool in that they amplify the effects of foreign monetary shocks, but changes in reserve requirements can insulate a repressed financial market from international financial shocks. The model also suggests that traditional measures of capital mobility such as interest parity conditions or the scale of gross private capital flows are of no value in assessing the openness of repressed financial systems.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5347.

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Date of creation: Nov 1995
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Publication status: published as Monetary and Economic Studies, Bank of Japan (December 1997): 81-103.
Handle: RePEc:nbr:nberwo:5347

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  1. Michael Dooley & Jeffrey Frankel & Donald J. Mathieson, 1987. "International Capital Mobility: What Do Saving-Investment Correlations Tell Us?," IMF Staff Papers, Palgrave Macmillan, vol. 34(3), pages 503-530, September.
  2. Jeffrey A. Frankel & Menzie D. Chinn, 1993. "Financial links around the Pacific Rim, 1982-1992," Pacific Basin Working Paper Series 93-08, Federal Reserve Bank of San Francisco.
  3. Menzie D. Chinn & Michael P. Dooley, 1997. "Asia Pacific Capital Markets: Integration and Implications for Economic Activity," NBER Chapters, in: Regionalism versus Multilateral Trade Arrangements, NBER-EASE Volume 6, pages 169-202 National Bureau of Economic Research, Inc.
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  7. Loungani, Prakash & Rush, Mark, 1995. "The Effect of Changes in Reserve Requirements on Investment and GNP," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 27(2), pages 511-26, May.
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  16. Fackler, James S. & Rogers, John H., 1993. "An empirical open-economy macro model with credit," Journal of Macroeconomics, Elsevier, Elsevier, vol. 15(2), pages 203-224.
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  20. Hamid Faruqee, 1992. "Dynamic Capital Mobility in Pacific Basin Developing Countries: Estimation and Policy Implications," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 706-717, September.
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Cited by:
  1. Leonardo Villar Gómez & David M. Salamanca Rojas, . "Un Modelo Teórico sobre Crédito, Represión Financiera y Flujos de Capital," Borradores de Economia 323, Banco de la Republica de Colombia.
  2. Salvador Valdés-Prieto & Marcelo Soto, 1998. "The Effectiveness of Capital Controls: Theory and Evidence from Chile," Empirica, Springer, Springer, vol. 25(2), pages 133-164, January.
  3. Phylaktis, Kate, 1999. "Capital market integration in the Pacific Basin region: an impulse response analysis," Journal of International Money and Finance, Elsevier, Elsevier, vol. 18(2), pages 267-287, February.
  4. Lapp, Susanne, 1996. "The Feldstein-Horioka paradox: A selective survey of the literature," Kiel Working Papers 752, Kiel Institute for the World Economy.
  5. Caprio, Gerard Jr. & Dooley, Michael & Leipziger, Danny & Walsh, Carl, 1996. "The lender of last resort function under a currency board : the case of Argentina," Policy Research Working Paper Series 1648, The World Bank.
  6. Thomas D. Willett & Young Seok Ahn & Manfred W. Keil, . "Capital Mobility for Developing Countries May Not Be So High," Claremont Colleges Working Papers 2000-26, Claremont Colleges.
  7. Bretschger, Lucas & Hettich, Frank, 2000. "Globalisation, capital mobility and tax competition: Theory and evidence for OECD countries," Wirtschaftswissenschaftliche Diskussionspapiere 07/2000, Ernst Moritz Arndt University of Greifswald, Faculty of Law and Economics.
  8. Willett, Thomas D. & Keil, Manfred W. & Ahn, Young Seok, 2002. "Capital mobility for developing countries may not be so high," Journal of Development Economics, Elsevier, vol. 68(2), pages 421-434, August.
  9. Phylaktis, Kate, 1997. "Capital market integration in the Pacific-Basin region: An analysis of real interest rate linkages," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 5(2), pages 195-213, June.
  10. Alejandro Reynoso, 2002. "Can subsidiaries of foreign banks contribute to the stability of the Forex market in Emerging Economies?," Working Papers, Centro de Investigacion Economica, ITAM 0205, Centro de Investigacion Economica, ITAM.
  11. George Furstenberg, 1998. "From Worldwide Capital Mobility to International Financial Integration: A Review Essay," Open Economies Review, Springer, Springer, vol. 9(1), pages 53-84, January.
  12. Alejandro Reynoso, 2002. "On the Effects of Regulation-Induced Forex Market Segmentation in Small Open Economies," Working Papers, Centro de Investigacion Economica, ITAM 0204, Centro de Investigacion Economica, ITAM.
  13. Islam, Roumeen, 2000. "Should capital flows be regulated? - a look at the issues and policies," Policy Research Working Paper Series 2293, The World Bank.

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