The Macroeconomic Effects of Capital Controls and the Stabilization of the Balance of Trade

Enrique Mendoza

No 1990/109, IMF Working Papers from International Monetary Fund

Abstract: A dynamic stochastic equilibrium model of a small open economy is used to quantify the macroeconomic effects of introducing capital controls to stabilize the balance of trade. This model focuses on the role of international trade and foreign debt as instruments that help smooth consumption in response to productivity or terms-of-trade disturbances. The model rationalizes some key empirical regularities that characterize business fluctuations and the dynamics of savings and investment in post-war Canada. The results show that capital controls have small effects on both the basic characteristics of macroeconomic fluctuations and the level of welfare. A fiscal strategy that successfully enforces capital controls by introducing taxes on foreign interest income is also studied in some detail.

Keywords: WP; balance of trade; trade surplus; capital stock; trade-balance improvement; free-trade economy; trade-balance target; benchmark economy; trade-balance-output ratio; utility function; Trade balance; Capital controls; Consumption; Foreign assets; Trade liberalization (search for similar items in EconPapers)
Pages: 54
Date: 1990-11-01
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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:1990/109

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