Capital controls and the political discount: The Spanish experience in the late 1980s

Philippe Bacchetta

Open Economies Review, 1996, vol. 7, issue 4, 349-369

Abstract: This article examines the wedge between Madrid and London peseta interest rates in the late 1980s, when controls on capital inflows were imposed. A model of onshore and offshore markets and of arbitrage between the two is proposed, where arbitrage has a dynamic structure caused by the process of controls avoidance. The model implies, first, that the wedge can follow an ARMA process and, second, that onshore and offshore rates can be cointegrated and can adjust according to an error correction mechanism. These models are consistent with the data and show that the monetary independence given by the controls was limited. Copyright Kluwer Academic Publishers 1996

Keywords: capital controls; country premium; F32; F36 (search for similar items in EconPapers)
Date: 1996
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DOI: 10.1007/BF01886369

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