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|
|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: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- Dornbusch, Rudiger, 1973. "Devaluation, Money, and Nontraded Goods," American Economic Review, American Economic Association, vol. 63(5), pages 871-880, December.
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NBER Working Papers
0557, National Bureau of Economic Research, Inc.
- Obstfeld, Maurice, 1981. "Capital Mobility and Devaluation in an Optimizing Model with Rational Expectations," American Economic Review, American Economic Association, vol. 71(2), pages 217-221, May.
- Robert E. Cumby, 1984.
"Monetary Policy Under Dual Exchange Rates,"
NBER Working Papers
1424, National Bureau of Economic Research, Inc.
- Calvo, Guillermo A., 1981. "Devaluation: Levels versus rates," Journal of International Economics, Elsevier, vol. 11(2), pages 165-172, May.
- Flood, Robert P., 1978. "Exchange rate expectations in dual exchange markets," Journal of International Economics, Elsevier, vol. 8(1), pages 65-77, February.
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