Capital Controls, The Dual Exchange Rate, and Devaluation
This paper re-examines the effect of devaluation under capital-account restrictions, adding to traditional formulations the seemingly minor (but realistic) assumption that central-bank reserves earn interest. The extra assumption has important implications. In an intertemporal model, devaluation is no longer neutral in the long run as it is in the literature on the monetary approach to the balance of payments. Further, the economy may possess multiple stationary states, some of them unstable.The analysis confirms, however, that even large devaluations must improve the balance of payments if the economy is initially at a stable stationary position. A by-product of the analysis is a pricing formula for the financial exchange rate in a dual exchange rate system. That formula is consistent with recent consumption-based models of asset pricing.
|Date of creation:||Apr 1984|
|Date of revision:|
|Publication status:||published as Obstfeld, Maurice. "Capital Controls, the Dual Exchange Rate, and Devaluation." Journal of International Economics, Vol. 20, No. 1, (February 1986), pp. 1-20.|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:1324. See general information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.