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Exchange Controls, Capital Controls, and International Financial Markets

  • Alan C. Stockman
  • Alejandro Hernandez D.

This paper examines the effects of restrictions on international financial markets. We analyze a general equilibrium, rational expectations model of a two-country world in which well-functioning international financial markets premit trade in all state-contingent securities except insofar as governments restrict these markets. The restrictions we examine take the form of taxes or quantitative controls on purchases of foreign currency and on the income from foreign assets. State-contingent financial markets allow households to allocate wealth optimally across states so that the imposition of exchange and capital controls has, roughly speaking, only substitution effects but no wealth effect. These restrictions reduce international trade in goods and lower ex-post welfare in the country in which they are imposed. Nominal prices and exchange rate are nonmonotonic functions of these restrictions.

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File URL: http://www.nber.org/papers/w1755.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1755.

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Date of creation: Oct 1985
Date of revision:
Publication status: published as The American Economic Review, Vol. 78, No. 3, pp. 362-374, (June 1988).
Handle: RePEc:nbr:nberwo:1755
Note: ITI IFM
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  1. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  2. Svensson, Lars E. O., 1985. "Currency prices, terms of trade, and interest rates: A general equilibrium asset-pricing cash-in-advance approach," Journal of International Economics, Elsevier, vol. 18(1-2), pages 17-41, February.
  3. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Scholarly Articles 3445091, Harvard University Department of Economics.
  4. Cumby, Robert E., 1984. "Monetary policy under dual exchange rates," Journal of International Money and Finance, Elsevier, vol. 3(2), pages 195-208, August.
  5. Branson, William H. & Henderson, Dale W., 1985. "The specification and influence of asset markets," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 15, pages 749-805 Elsevier.
  6. Maurice Obstfeld, 1984. "Capital Controls, The Dual Exchange Rate, and Devaluation," NBER Working Papers 1324, National Bureau of Economic Research, Inc.
  7. Adams, Charles & Greenwood, Jeremy, 1985. "Dual exchange rate systems and capital controls: An investigation," Journal of International Economics, Elsevier, vol. 18(1-2), pages 43-63, February.
  8. Alan C. Stockman & Lars E.O. Svensson, 1985. "Capital Flows, Investment, and Exchange Rates," NBER Working Papers 1598, National Bureau of Economic Research, Inc.
  9. Cooley, Thomas F & LeRoy, Stephen F & Raymon, Neil, 1984. "Econometric Policy Evaluation: Note," American Economic Review, American Economic Association, vol. 74(3), pages 467-70, June.
  10. Alan C. Stockman, 1978. "A Theory of Exchange Rate Determination," UCLA Economics Working Papers 113, UCLA Department of Economics.
  11. Persson, Torsten, 1984. "Real transfers in fixed exchange rate systems and the international adjustment mechanism," Journal of Monetary Economics, Elsevier, vol. 13(3), pages 349-369, May.
  12. Helpman, Elhanan & Razin, Assaf, 1982. "A Comparison of Exchange Rate Regimes in the Presence of Imperfect Capital Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 23(2), pages 365-88, June.
  13. Sargent, Thomas J, 1984. "Autoregressions, Expectations, and Advice," American Economic Review, American Economic Association, vol. 74(2), pages 408-15, May.
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