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The Effectiveness of Capital Controls: Implications for Monetary Autonomy in the Presence of Incomplete Market Separation

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  • Daniel Gros

    (International Monetary Fund)

Abstract

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.

Suggested Citation

  • 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.
  • Handle: RePEc:pal:imfstp:v:34:y:1987:i:4:p:621-642
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    Citations

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    Cited by:

    1. Barry Eichengreen & Andrew K. Rose & Charles Wyplosz, 1996. "Is There a Safe Passage to EMU? Evidence on Capital Controls and a Proposal," NBER Chapters,in: The Microstructure of Foreign Exchange Markets, pages 303-332 National Bureau of Economic Research, Inc.
    2. Glick, Reuven & Hutchison, Michael, 2011. "The illusive quest: Do international capital controls contribute to currency stability?," International Review of Economics & Finance, Elsevier, vol. 20(1), pages 59-70, January.
    3. Philippe Bacchetta, 1996. "Capital controls and the political discount: The Spanish experience in the late 1980s," Open Economies Review, Springer, vol. 7(4), pages 349-369, October.
    4. Oscar Bajo-Rubio & Sosvilla-Rivero Simon, 2001. "A Quantitative Analysis of the Effects of Capital Controls: Spain, 1986-1990," International Economic Journal, Taylor & Francis Journals, vol. 15(3), pages 129-146.
    5. Liliana Rojas-Suárez & Donald J Mathieson & Michael P. Dooley, 1996. "Capital Mobility and Exchange Market Intervention in Developing Countries," IMF Working Papers 96/131, International Monetary Fund.
    6. 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.
    7. Sweta Saxena & Kar-yiu Wong, 1999. "Currency Crises and Capital Control: A Survey," Working Papers 0045, University of Washington, Department of Economics.
    8. Reinhart, Carmen M. & Smith, R. Todd, 2002. "Temporary controls on capital inflows," Journal of International Economics, Elsevier, vol. 57(2), pages 327-351, August.
    9. Phylaktis, Kate, 1999. "Capital market integration in the Pacific Basin region: an impulse response analysis," Journal of International Money and Finance, Elsevier, vol. 18(2), pages 267-287, February.
    10. David B. Gordon & Ross Levine, 1988. "The capital flight "problem."," International Finance Discussion Papers 320, Board of Governors of the Federal Reserve System (U.S.).
    11. Mouhamadou Sy, 2012. "Exchange Rate Regimes, Capital Controls and the Pattern of Speculative Capital Flows," Working Papers halshs-00684591, HAL.
    12. Mouhamadou Sy, 2012. "Exchange Rate Regimes, Capital Controls and the Pattern of Speculative Capital Flows," PSE Working Papers halshs-00684591, HAL.

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