Capital Controls and Trade Liberalization in a Monetary Economy

B. Jang

No 1999/024, IMF Working Papers from International Monetary Fund

Abstract: This paper reexamines Aizenman’s (1985) results on the effects of capital controls during unanticipated trade liberalization using an intertemporal optimizing monetary model. Unlike in Aizenman’s model, which is based on the currency substitution model, foreign money is an interest-bearing asset in this paper, and its major role is to smooth intertemporal consumption. With this modification, Aizenman’s results are reversed, thus showing that the effects of capital controls during trade liberalization would vary greatly depending on the role of foreign money in a country. The effects of an anticipated trade liberalization are also studied.

Keywords: WP; current account; Capital Controls; Trade Liberalization; liberalization policy; capital mobility; money balance; current account adjustment; Exchange rates; Consumption; Demand for money (search for similar items in EconPapers)
Pages: 24
Date: 1999-03-01
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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:1999/024

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