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Capital Flows, the Current Account, and the Real Exchange Rate: Consequences of Liberalization and Stabilization


  • Maurice Obstfeld


This paper develops a dynamic framework in which macroeconomic liberalization and stabilization measures of the type recently seen in Latin America can be studied. The model is sufficiently general to cover both polar cases of a closed capital account and free private capital mobility, so the effects of liberalizing external asset trade can be studied. Capital-account liberalization leads to an initial period of real appreciation, but a long-run real depreciation; and the economy passes through alternating phases of boom and slump in the process. Devaluation is found to be nonneutral even in the long run and possibly contractionary in the short run. In contrast, a change in the rate of exchange depreciation is neutral, even with sticky prices, when capital is fully mobile. When capital is immobile, a disinflationary reduction inthe rate of exchange-rate crawl has effects that are the opposite of those arising from capital-account opening. The model suggests that capital-account liberalization, rather than disinflation, played a part in causing the massive real exchange-rate appreciation that accompanied recent Latin American programs of economic reform.

Suggested Citation

  • Maurice Obstfeld, 1984. "Capital Flows, the Current Account, and the Real Exchange Rate: Consequences of Liberalization and Stabilization," NBER Working Papers 1526, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1526
    Note: ITI IFM

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    Cited by:

    1. Froot, Kenneth A., 1988. "Credibility, real interest rates, and the optimal speed of trade liberalization," Journal of International Economics, Elsevier, vol. 25(1-2), pages 71-93, August.
    2. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2004. "Financial development and the instability of open economies," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1077-1106, September.
    3. Bartolini, Leonardo & Drazen, Allan, 1997. "When liberal policies reflect external shocks, what do we learn?," Journal of International Economics, Elsevier, vol. 42(3-4), pages 249-273, May.
    4. Sebastian Edwards, 1986. "Commodity Export Prices and the Real Exchange Rate in Developing Countries: Coffee in Colombia," NBER Chapters, in: Economic Adjustment and Exchange Rates in Developing Countries, pages 233-266, National Bureau of Economic Research, Inc.
    5. Guillermo Le Fort, 1986. "La Dinámica de Ajuste del Tipo de Cambio Real y la Tasa de Interés Real luego de una Devaluación," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 23(68), pages 49-68.
    6. Drabek, Zdenek & Brada, Josef C., 1998. "Exchange Rate Regimes and the Stability of Trade Policy in Transition Economies," Journal of Comparative Economics, Elsevier, vol. 26(4), pages 642-668, December.
    7. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 1999. "Capital Markets and the Instability of Open Economies," Working Papers 99.01, Swiss National Bank, Study Center Gerzensee.
    8. Sebastian Edwards, 1985. "Commodity Export Boom and the Real Exchange Rate: The Money-Inflation Link," NBER Working Papers 1741, National Bureau of Economic Research, Inc.
    9. Ballard, Charles L. & Goddeeris, John H., 2004. "First, Do No Harm: Welfare Gains and Welfare Losses from Environmental Taxation," Conference papers 331257, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    10. Lucy Rees & Rod Tyers, 2004. "On the Robustness of Short Run Gains from Trade Reform," CEPR Discussion Papers 474, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    11. Sigit Setiawan, 2017. "Trade Liberalization, Consumption, and Real Exchange Rate in Seven ASEAN+6 Countries," Journal of Economics and Behavioral Studies, AMH International, vol. 9(4), pages 73-86.

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