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Capital Account Policies and the Real Exchange Rate

  • Olivier Jeanne

This paper presents a simple model of how a small open economy can undervalue its real exchange rate using its capital account policies. The paper presents several properties of such policies, and proposes a rule of thumb to assess their welfare cost. The model is applied to an analysis of Chinese capital account policies.

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File URL: http://www.jstor.org/stable/pdfplus/10.1086/669583
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File URL: http://www.jstor.org/stable/full/10.1086/669583
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Article provided by University of Chicago Press in its journal NBER International Seminar on Macroeconomics.

Volume (Year): 9 (2013)
Issue (Month): 1 ()
Pages: 7 - 42

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Handle: RePEc:ucp:intsma:doi:10.1086/669583
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  1. Christopher D. Carroll & Olivier Jeanne, 2009. "A Tractable Model of Precautionary Reserves, Net Foreign Assets, or Sovereign Wealth Funds," NBER Working Papers 15228, National Bureau of Economic Research, Inc.
  2. Joshua Aizenman & Jaewoo Lee, 2005. "International reserves: precautionary versus mercantilist views, theory and evidence," Proceedings, Federal Reserve Bank of San Francisco.
  3. Mark Aguiar & Manuel Amador, 2009. "Growth in the Shadow of Expropriation," NBER Working Papers 15194, National Bureau of Economic Research, Inc.
  4. Durdu, Ceyhun Bora & Mendoza, Enrique G. & Terrones, Marco E., 2009. "Precautionary demand for foreign assets in Sudden Stop economies: An assessment of the New Mercantilism," Journal of Development Economics, Elsevier, vol. 89(2), pages 194-209, July.
  5. Guonan Ma & RobertN McCauley, 2008. "Efficacy Of China'S Capital Controls: Evidence From Price And Flow Data," Pacific Economic Review, Wiley Blackwell, vol. 13(1), pages 104-123, 02.
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  7. David K. Backus & Patrick J. Kehoe, 1988. "On the denomination of government debt: a critique of the portfolio balance approach," Staff Report 116, Federal Reserve Bank of Minneapolis.
  8. Damiano Sandri, 2014. "Growth and Capital Flows with Risky Entrepreneurship," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(3), pages 102-23, July.
  9. Javier Bianchi, 2010. "Overborrowing and Systemic Externalities in the Business Cycle," 2010 Meeting Papers 96, Society for Economic Dynamics.
  10. Maurice Obstfeld & Kenneth S. Rogoff, 2005. "Global Current Account Imbalances and Exchange Rate Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(1), pages 67-146.
  11. Marcos D. Chamon & Eswar S. Prasad, 2010. "Why Are Saving Rates of Urban Households in China Rising?," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 93-130, January.
  12. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  13. Olivier Jeanne & Arvind Subramanian & John Williamson, 2012. "Who Needs to Open the Capital Account?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 5119.
  14. V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 533-563.
  15. Zheng Song & Kjetil Storesletten & Fabrizio Zilibotti, 2011. "Growing Like China," American Economic Review, American Economic Association, vol. 101(1), pages 196-233, February.
  16. Sarno, Lucio & Taylor, Mark P, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective, and, If So, How Does It Work?," CEPR Discussion Papers 2690, C.E.P.R. Discussion Papers.
  17. Sebastian Edwards, 1985. "On the Interest Rate Elasticity of the Demand for International Reserves: Some Evidence from Developing Coutries," NBER Working Papers 1532, National Bureau of Economic Research, Inc.
  18. Disyatat, Piti & Galati, Gabriele, 2007. "The effectiveness of foreign exchange intervention in emerging market countries: Evidence from the Czech koruna," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 383-402, April.
  19. Anton Korinek, 2011. "The New Economics of Prudential Capital Controls: A Research Agenda," IMF Economic Review, Palgrave Macmillan, vol. 59(3), pages 523-561, August.
  20. International Monetary Fund, 2011. "Foreign Exchange Intervention; A Shield Against Appreciation Winds?," IMF Working Papers 11/165, International Monetary Fund.
  21. Kumhof, Michael, 2010. "On the theory of sterilized foreign exchange intervention," Journal of Economic Dynamics and Control, Elsevier, vol. 34(8), pages 1403-1420, August.
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