Institutional Affiliation: Centro de Investigación Económica, ITAM
|Exchange Controls, Capital Controls, and International Financial Markets|
with : w1755
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 wh...
Published: The American Economic Review, Vol. 78, No. 3, pp. 362-374, (June 1988). citation courtesy of