The Effectiveness of Capital Controls: Implications for Monetary Autonomy in the Presence of Incomplete Market Separation
The long-run ineffectiveness of quantitative capital controls is demonstrated with a model in which economic agents can evade controls by incurring costs at the time that capital is transferred. Differentials between domestic and off-shore interest rates, as well as expectations about future yield differentials, provide incentives for capital flows, which in turn feed back to eliminate the differentials in the long run. Consequently, under fixed exchange rates the proportion of a change in domestic credit that is "offset" by capital flows is a function of time; quantitative capital controls can provide only temporary autonomy for national monetary policy.
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Volume (Year): 34 (1987)
Issue (Month): 4 (December)
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