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

November 1, 1990

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Enrique G. Mendoza The Macroeconomic Effects of Capital Controls and the Stabilization of the Balance of Trade, (USA: International Monetary Fund, 1990) accessed September 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Balance of payments, Capital controls, Consumption, External position, Foreign assets, International trade, National accounts, Trade balance, Trade liberalization

Keywords: Balance of trade, Benchmark economy, Capital controls, Capital stock, Consumption, Foreign assets, Free-trade economy, Trade balance, Trade liberalization, Trade surplus, Trade-balance improvement, Trade-balance target, Trade-balance-output ratio, Utility function, WP

Publication Details

Pages:

54
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1990/109
Stock No:

WPIEA1091990
ISBN:

9781451946055
ISSN:

1018-5941

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