Macroeconomic effect of capital controls as a safeguard against the capital inflow problem

Shigeto Kitano ()

Journal of International Trade & Economic Development, 2004, vol. 13, issue 3, pages 233-263

Abstract: Concerns that a rapid surge in capital inflow leads to loss of autonomy in macroeconomic policy, and that its reversal has significant negative effects on an economy, have motivated capital controls during the 1990s. Under a fixed exchange rate system without capital-account restrictions, a decrease in world nominal interest rates causes in a small open economy a deterioration in the current account, real exchange rate appreciation, and inflationary pressure, as pointed out by Calvo et al . (1994 , 1996 ). This paper examines macroeconomic effects of capital-account restrictions as a policy response to the capital inflow problem under fixed exchange rates. Theoretical analysis shows that capital-account restrictions not only stem the capital inflow but also reverse the associated macroeconomic effects. The model implies that capital-account restrictions are effective measures against the capital inflow problem of emerging markets in the 1990s.

Keywords: Capital Controls; Capital Inflows; Real Exchange Rate; Current Account; Inflation (search for similar items in EconPapers)
Date: 2004
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