Can Capital Controls Alter the Inflation-Unemployment Tradeoff?

Assaf Razin and Chi-Wa Yuen

No 5239, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: It is well-known that, in the Mundell-Fleming model, capital mobility creates a channel through which permanent (transitory) shocks to aggregate demand such as fiscal and trade shocks are completely (partially) neutralized by the response of the real exchange rate. An important policy implication of the model which went largely unnoticed is how the transmission of these shocks under different degrees of capital mobility may alter the inflation-unemployment tradeoff, i.e., the Phillips Curve. In the context of the stochastic Mundell-Fleming model, we show that capital controls reduce the output/employment variations at the expense of bigger variations in inflation rates. When the policy maker puts heavier weight on stable employment than on stable inflation, therefore, his/her objective can be attained more easily under capital controls.

JEL-codes: F2 (search for similar items in EconPapers)
Date: 1995-08
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Working Paper: Can Capital Controls Alter the Inflation-Unemployment Trade-off? (1995)
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