Self-fulfillment Expectations, Speculation Attacks, and Capitol Controls

Harris Dellas and Alan C. Stockman ()

No 2625, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines the endogenous implementation of capital controls in the context of a fixed exchange rate regime. It is shown that if there exists a non-zero probability that the policymaker's response to a speculative attack on official foreign reserves will be the introduction of controls, such an attack may occur even when current and expected monetary policy is consistent with a permanently viable, control-free fixed exchange rate regime. Consequently, capital controls may be the outcome of self- fulfilling expectations rather than the result of imprudent economic policies.

Date: 1988-06
Note: ITI IFM

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