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Capital Controls and the Real Exchange Rate

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  • van Wijnbergen, Sweder

Abstract

Using an intertemporal, two-country general equilibrium model, I demonstrate that international asymmetries in expenditure patterns determine the real exchange rate effects of capital controls. Capital import taxes lower world interest rates but raise home interest rates. These changes in interest rates bring about a change in the composition of world expenditure, with a shift of home expenditure from the present ("today") to the future ("tomorrow") and a shift of foreign aggregate expenditure from tomorrow to today. If the pattern of expenditure across commodities is the same at home and abroad, the change in the composition of world expenditure has no effects on the (excess) demand for any particular commodity. Therefore, with identical expenditure patterns at home and abroad, the imposition of capital controls has no effect on the real exchange rate. However, when consumers have a preference for domestically produced goods, the shift in composition of world expenditure caused by interest rate changes implies a decline in demand today for home goods. In that case, capital controls lower the real exchange rate. Of course in period two the reverse happens. This result is mitigated when the country imposing capital controls is a large debtor.

Suggested Citation

  • van Wijnbergen, Sweder, 1985. "Capital Controls and the Real Exchange Rate," CEPR Discussion Papers 89, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:89
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    Cited by:

    1. Alberto Alesina & Vittorio Grilli & Gian Maria Milesi-Ferrett, 1993. "The Political Economy of Capital Controls," NBER Working Papers 4353, National Bureau of Economic Research, Inc.
    2. Timothy J Condon, 1986. "Flujo de Comercio y la Política del Tipo de Cambio Reptante: Un Modelo de Predicción Perfecta de Largo Plazo," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 23(68), pages 25-48.
    3. James Tybout, 1985. "Desempeño Financiero de las Empresas Durante las Reformas en el Cono Sur," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 22(65), pages 3-12.
    4. de Brouwer,Gordon, 1999. "Financial Integration in East Asia," Cambridge Books, Cambridge University Press, number 9780521651486.

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