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Terms of Trade Disturbances, Real Exchange Rates, and Welfare: The Role of Capital Controls and Labor Market Distortions

  • Edwards, Sebastian
  • Ostry, Jonathan D

Many arguments in favor of maintaining capital controls within the European Community have not paid sufficient attention to the welfare consequences of this type of intervention. The authors' paper provides a simple choice-theoretic framework in which the welfare effects of capital controls can be assessed. First, they compare the welfare effects of terms of trade shocks in economies with and without capital controls. Second, the authors inquire into the nature of second best arguments for maintaining capital controls, given that other distortions (notably in the labor market) will remain after the European single market is in place in 1992. Copyright 1992 by Royal Economic Society.

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Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 44 (1992)
Issue (Month): 1 (January)
Pages: 20-34

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Handle: RePEc:oup:oxecpp:v:44:y:1992:i:1:p:20-34
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  1. Joshua Aizenman, 1985. "On the Complementarity of Commercial Policy, Capital Controls and Inflation Tax," NBER Working Papers 1583, National Bureau of Economic Research, Inc.
  2. Rudiger Dornbusch, 1981. "Real Interest Rates, Home Goods, and Optimal External Borrowing," NBER Working Papers 0779, National Bureau of Economic Research, Inc.
  3. Sebastian Edwards, 1987. "Tariffs, Terms of Trade, and the Real Exchange Rate in an Intertemporal Optimizing Model of the Current Account," NBER Working Papers 2175, National Bureau of Economic Research, Inc.
  4. Adams, Charles & Greenwood, Jeremy, 1985. "Dual exchange rate systems and capital controls: An investigation," Journal of International Economics, Elsevier, vol. 18(1-2), pages 43-63, February.
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