Exchange Controls, Capital Controls, and International Financial Markets

Alan Stockman and Alejandro Hernandez D

American Economic Review, 1988, vol. 78, issue 3, 362-74

Abstract: This paper examines the effects of restrictions on international financial m arkets in a general equilibrium, rational expectations model of a two -country world. State-contingent financial markets allow households t o allocate wealth optimally across states so that the imposition of e xchange and capital controls has, roughly speaking, only substitution effects but no wealth effect. Taxes or quantitative controls on purc hases of foreign currency and on the income from foreign assets reduc e international trade in goods, lower ex post welfare in the country in which they are imposed, and affect nominal prices and the exchange rate. Copyright 1988 by American Economic Association.

Date: 1988
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Working Paper: Exchange Controls, Capital Controls, and International Financial Markets (1985)
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