Working Paper: CEPR ID: DP343
Authors: Alberto Giovannini; Jae Won Park
Abstract: This paper studies the effects of prohibiting individuals from holding foreign assets, and of allowing firms to trade in foreign assets only up to what is needed to finance export and import activities. Although firms can perform arbitrage between domestic and foreign financial markets, this arbitrage does not eliminate the distortions in asset markets; instead, the distortions are transmitted to the domestic goods market. The paper discusses the effects of shocks in foreign financial markets and in domestic fiscal policy. We show that both the dynamics and steady states are crucially affected by capital controls.
Keywords: capital controls; trade finance; overlapping generations model
JEL Codes: 310; 441
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Capital Controls (F38) | Distortions in Asset Markets (G19) |
| Distortions in Asset Markets (G19) | Domestic Goods Market (D19) |
| Foreign Interest Rates (E43) | Domestic Interest Rates (E43) |
| Foreign Interest Rates (E43) | Current Account Deficits (F32) |
| Domestic Fiscal Policy (E62) | Dynamics of the Economy under Capital Controls (F32) |
| Capital Controls (F38) | Dampening of Private Wealth Fluctuations (G59) |
| Tighter Capital Controls (F38) | Effects of Foreign Interest Rate Changes on Domestic Interest Rates (E43) |
| Capital Controls (F38) | Long-Run Equilibrium Ambiguity (D59) |