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Capital Mobility and Exchange Market Intervention in Developing Countries

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  • Michael P. Dooley
  • Donald J. Mathieson
  • Liliana Rojas-Suarez

Abstract

This paper develops a new technique for measuring changes in the degree of capital mobility confronting a developing country that has restrictions on capital flows and official ceilings on domestic interest rates. Because such official controls rule out the use of traditional interest rate parity conditions to measure changes in the degree of capital mobility, the analysis first examines an intertemporal model of an open economy. This model describes the linkages between the cost of undertaking disguised capital flows, the current account, capital controls, domestic and external financial market conditions, and the authorities' foreign exchange market interventions. The model suggests a means of measuring changes in the cost of undertaking disguised capital flows, based on the past history of differentials between external interest rates (adjusted for exchange rate changes) and domestic ceiling interest rates, provided that the authorities' foreign exchange market activities are incorporated into the analysis. Parameter estimates for Korea, Mexico, and the Philippines indicate that the real cost of undertaking disguised capital flows declined on average by nearly 70 percent between the early 1970s and the late 1980s.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6247.

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Date of creation: Oct 1997
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Handle: RePEc:nbr:nberwo:6247

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  1. Helmut Reisen & Hélène Yèches, 1991. "Time-Varying Estimates on the Openness of the Capital Account in Korea and Taiwan," OECD Development Centre Working Papers 42, OECD Publishing.
  2. Daniel Gros, 1987. "The Effectiveness of Capital Controls: Implications for Monetary Autonomy in the Presence of Incomplete Market Separation," IMF Staff Papers, Palgrave Macmillan, vol. 34(4), pages 621-642, December.
  3. Liliana Rojas-Suárez & Donald J. Mathieson, 1993. "Liberalization of the Capital Account," IMF Occasional Papers 103, International Monetary Fund.
  4. McNelis, Paul D & Neftci, Salih N, 1982. "Policy-Dependent Parameters in the Presence of Optimal Learning: An Application of Kalman Filtering to the Fair and Sargent Supply-Side Equations," The Review of Economics and Statistics, MIT Press, vol. 64(2), pages 296-306, May.
  5. Montiel, Peter J, 1994. "Capital Mobility in Developing Countries: Some Measurement Issues and Empirical Estimates," World Bank Economic Review, World Bank Group, World Bank Group, vol. 8(3), pages 311-50, September.
  6. Harvey,Andrew C., 1991. "Forecasting, Structural Time Series Models and the Kalman Filter," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521405737.
  7. José Saúl Lizondo, 1983. "Interest Differential and Covered Arbitrage," NBER Chapters, in: Financial Policies and the World Capital Market: The Problem of Latin American Countries, pages 221-244 National Bureau of Economic Research, Inc.
  8. Liliana Rojas-Suárez, 1992. "Currency Substitution and Inflation in Peru," IMF Working Papers 92/33, International Monetary Fund.
  9. John F. O. Bilson & Richard C. Marston, 1984. "Exchange Rate Theory and Practice," NBER Books, National Bureau of Economic Research, Inc, number bils84-1, October.
  10. Lawrence H. Summers, 1986. "Tax Policy and International Competitiveness," NBER Working Papers 2007, National Bureau of Economic Research, Inc.
  11. Leonardo Leiderman & Carmen Reinhart & Guillermo Calvo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America," IMF Working Papers 92/62, International Monetary Fund.
  12. Haque, Nadeem U. & Montiel, Peter, 1991. "Capital mobility in developing countries: Some empirical tests," World Development, Elsevier, Elsevier, vol. 19(10), pages 1391-1398, October.
  13. Michael P. Dooley & Donald J. Mathieson, 1992. "Exchange rate policy, international capital mobility and monetary policy instruments," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, pages 68-95.
  14. David Y. Wong, 1988. "What do saving - investment relationships tell us about capital mobility?," Working Papers 88-10, Federal Reserve Bank of Philadelphia.
  15. Wickens, Michael R, 1982. "The Efficient Estimation of Econometric Models with Rational Expectations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(1), pages 55-67, January.
  16. Sebastian Edwards & Mohsin S. Khan, 1985. "Interest Rate Determination in Developing Countries: A Conceptual Framework (Détermination du taux d'intérêt dans les pays en développement: cadre théorique) (Determinación de los ti," IMF Staff Papers, Palgrave Macmillan, vol. 32(3), pages 377-403, September.
  17. 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.
  18. Leiderman,Leonardo & Razin,Assaf (ed.), 1994. "Capital Mobility," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521454384.
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Citations

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Cited by:
  1. Sebastian Edwards, 2005. "Capital Controls, Sudden Stops and Current Account Reversals," NBER Working Papers 11170, National Bureau of Economic Research, Inc.
  2. Víctor-Hugo Alcalá Ríos & Manuel Gómez Zaldívar & Daniel Ventosa-Santaulària, 2011. "Paradoja Feldstein-Horioka: el caso de México (1950-2007)," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 26(2), pages 293-313.
  3. Christopher J. Neely, 2001. "The practice of central bank intervention: looking under the hood," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-10.
  4. Fatma Marrakchi Charfi, 2013. "Capital Flows, Real Exchange Rates, and Capital Controls: What Is the Scope of Liberalization for Tunisia?," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 60(4), pages 515-540, June.
  5. Dilip K. Das, 2001. "Stimulants to capital inflows into emerging markets and the recent role of speculators," Journal of International Development, John Wiley & Sons, Ltd., vol. 13(1), pages 25-44.
  6. Sebastian Edwards, 1999. "How Effective Are Capital Controls?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 13(4), pages 65-84, Fall.
  7. Sebastian Edwards, 1998. "Interest Rate Volatily, Contagion and Convergence: And Empirical Investigation of the Cases of Argentina, Chile and México," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 55-86, November.
  8. Sebastian Edwards, 1998. "Interest Rate Volatility, Capital Controls, and Contagion," NBER Working Papers 6756, National Bureau of Economic Research, Inc.
  9. Buch, Claudia M. & Heinrich, Ralph P. & Pierdzioch, Christian, 2001. "Globalisierung der Finanzmärkte: Freier Kapitalverkehr oder Tobin-Steuer?," Kiel Discussion Papers 381, Kiel Institute for the World Economy (IfW).
  10. Sebastian Edwards, 2001. "Capital Mobility and Economic Performance: Are Emerging Economies Different?," NBER Working Papers 8076, National Bureau of Economic Research, Inc.

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