Capital Controls and International Portfolio Theory: A Microeconomic Approach

Marjorie Rose

No 1990/051, IMF Working Papers from International Monetary Fund

Abstract: This paper examines the effects of capital controls on asset prices. A closed-form valuation model by Eun and Janakirimanan (1986) is extended to analyze the impact of three restrictions on international portfolio investment: a percentage quantity constraint on the amount of foreign securities a domestic resident may hold in her portfolio; a constraint on the absolute amount of foreign securities a domestic resident may hold; and a percentage tax on the domestic purchase price of a foreign security. Comparative statics and numerical analysis are used to reveal the effects of these distortions on domestic and world equilibrium prices.

Keywords: WP; foreign securities; security demand; choice problem; securities result; information cost; percentage portfolio constraint; Securities; Asset prices; Foreign assets; Foreign direct investment; Capital markets (search for similar items in EconPapers)
Pages: 24
Date: 1990-06-01
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