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When Liberal Policies Reflect External Shocks, What Do We Learn?

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Leonardo Bartolini
Allan Drazen

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Abstract

We present a model where policies of free capital mobility can signal governments' future policies, but the informativeness of the signal depends on the path of world interest rates. Capital flows to emerging markets reflect investors' perception of these markets' political risk. With low world interest rates, emerging markets experience a capital inflow and engage in a widespread policy of free capital mobility; with higher rates, only sufficiently committed countries allow free capital mobility, whereas others impose controls to trap capital onshore, thus signaling future policies affecting capital mobility. These predictions are consistent with the recent experience of capital flows and policies affecting capital mobility in developing countries.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5727.

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Date of creation: Mar 1998
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Handle: RePEc:nbr:nberwo:5727

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Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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  1. Maurice Obstfeld, 1987. "Capital Flows, the Current Account, and the Real Exchange Rate: Consequences of Liberalization and Stabilization," NBER Working Papers 1526, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Kenneth Rogoff, 1987. "Reputational Constraints on Monetary Policy," NBER Working Papers 1986, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Reinhart, Carmen & Leiderman, Leonardo, 1994. "Capital inflows to Latin America," MPRA Paper 13406, University Library of Munich, Germany. [Downloadable!]
  4. Bacchetta, Philippe, 1992. "Liberalization of Capital Movements and of the Domestic Financial System," Economica, London School of Economics and Political Science, vol. 59(236), pages 465-74, November. [Downloadable!] (restricted)
  5. Paul R. Masson & Allan Drazen, 1994. "Credibility of Policies Versus Credibility of Policymakers," IMF Working Papers 94/49, International Monetary Fund.
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  6. Gian Maria Milesi-Ferretti & Vittorio Grilli, 1995. "Economic Effects and Structural Determinants of Capital Controls," IMF Working Papers 95/31, International Monetary Fund.
  7. Calvo, Sara & Reinhart, Carmen, 1996. "Capital flows to Latin America : Is there evidence of contagion effects?," Policy Research Working Paper Series 1619, The World Bank. [Downloadable!]
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  8. Rogoff, Kenneth, 1987. "Reputational constraints on monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 26(1), pages 141-181, January. [Downloadable!] (restricted)
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  1. Helge Berger & Jan-Egbert Sturm & Jakob de Haan, 2001. "Capital Controls and Exchange Rate Regimes: An Empirical Investigation," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  2. Allan Drazen, 1997. "Towards a Political-Economic Theory of Domestic Debt," NBER Working Papers 5890, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Reuven Glick & Xueyan Guo & Michael Hutchison, 2004. "Currency Crises, Capital Account Liberalization, and Selection Bias," EPRU Working Paper Series 04-11, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
    Other versions:
  4. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 1999. "Capital Markets and the Instability of Open Economies," CEPR Discussion Papers 2083, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Roni Frish, 2007. "Restricting capital outflow," Economics of Governance, Springer, vol. 8(2), pages 153-177, February. [Downloadable!] (restricted)
  6. Sweta Saxena & Kar-yiu Wong, 1999. "Currency Crises and Capital Control: A Survey," Discussion Papers in Economics at the University of Washington 0045, Department of Economics at the University of Washington. [Downloadable!]
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  7. Bernardo S. de M. Carvalho & Márcio G. P. Garcia, 2006. "Ineffective Controls On Capital Inflows Under Sophisticated Financial Markets: Brazil In The Nineties," Anais do XXXIV Encontro Nacional de Economia [Proceedings of the 34th Brazilian Economics Meeting] 58, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
    Other versions:
  8. Hans-Joachim Voth, 2003. "Convertibility, currency controls and the cost of capital in Western Europe, 1950-1999," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(3), pages 255-276. [Downloadable!]
    Other versions:
  9. Barry Eichengreen & David Leblang, 2003. "Capital account liberalization and growth: was Mr. Mahathir right?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(3), pages 205-224. [Downloadable!]
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  10. Jose De Gregorio & Sebastian Edwards & Rodrigo O. Valdes, 2000. "Controls on Capital Inflows: Do they Work?," NBER Working Papers 7645, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Jane Sneddon Little & Giovanni P. Olivei, 1999. "Why the interest in reforming the International Monetary System?," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 53-84. [Downloadable!]
  12. Philippe Bacchetta & Eric van Wincoop, 1998. "Capital Flows to Emerging Markets: Liberalization, Overshooting, and Volatility," NBER Working Papers 6530, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  13. Ashoka Mody & Abdul Abiad, 2003. "Financial Reform: What Shakes It? What Shapes It?," IMF Working Papers 03/70, International Monetary Fund. [Downloadable!]
    Other versions:
  14. Stefano Battilossi, 2003. "Capital Mobility And Financial Repression In Italy, 1960-1990: A Public Finance Perspective," Working Papers in Economic History wh030602, Universidad Carlos III, Departamento de Historia Económica e Instituciones. [Downloadable!]
  15. Reuven Glick & Michael Hutchison, 2002. "Capital controls and exchange rate instability in developing economies," Pacific Basin Working Paper Series 00-05, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  16. Angelos Antzoulatos & Simone Peart, 1998. "Import demand under a foreign exchange constraint," Research Paper 9810, Federal Reserve Bank of New York. [Downloadable!]
  17. Prakash Loungani & Assaf Razin & Chi-Wa Yuen, 1997. "Capital mobility and the output-inflation tradeoff," International Finance Discussion Papers 577, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  18. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 2004. "Financial Development and the Instability of Open Economies," NBER Working Papers 10246, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  19. Reuven Glick & Michael Hutchison, . "Stopping "Hot Money" or Signaling Bad Policy? Capital Controls and the Onset of Currency Crises," EPRU Working Paper Series 00-14, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
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