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Can Capital Controls Alter the Inflation-Unemployment Tradeoff?

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  • Assaf Razin
  • Chi-Wa Yuen

Abstract

It is well-known that, in the Mundell-Fleming model, capital mobility creates a channel through which permanent (transitory) shocks to aggregate demand such as fiscal and trade shocks are completely (partially) neutralized by the response of the real exchange rate. An important policy implication of the model which went largely unnoticed is how the transmission of these shocks under different degrees of capital mobility may alter the inflation-unemployment tradeoff, i.e., the Phillips Curve. In the context of the stochastic Mundell-Fleming model, we show that capital controls reduce the output/employment variations at the expense of bigger variations in inflation rates. When the policy maker puts heavier weight on stable employment than on stable inflation, therefore, his/her objective can be attained more easily under capital controls.

Suggested Citation

  • Assaf Razin & Chi-Wa Yuen, 1995. "Can Capital Controls Alter the Inflation-Unemployment Tradeoff?," NBER Working Papers 5239, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:5239
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    1. Campbell, John Y. & Clarida, Richard H., 1987. "The term structure of euromarket interest rates : An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 19(1), pages 25-44, January.
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    7. Robert P. Flood & Nancy Peregrim Marion, 1982. "The Transmission of Disturbances under Alternative Exchange-Rate Regimes with Optimal Indexing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(1), pages 43-66.
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    Cited by:

    1. Alexei G. Orlov, 2005. "Pros and Cons of Capital Controls in the Presence of Incomplete Markets," The American Economist, Sage Publications, vol. 49(1), pages 79-93, March.
    2. Abhijit Sen Gupta, 2008. "Does capital account openness lower inflation?," International Economic Journal, Taylor & Francis Journals, vol. 22(4), pages 471-487.
    3. Ila Patnaik & Abhijit Sen Gupta & Ajay Shah, 2012. "Determinants of Trade Misinvoicing," Open Economies Review, Springer, vol. 23(5), pages 891-910, November.

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    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business

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