Working Paper: NBER ID: w1755
Authors: Alan C. Stockman; Alejandro Hernandez
Abstract: This paper examines the effects of restrictions on international financial markets. We analyze a general equilibrium, rational expectations model of a two-country world in which well-functioning international financial markets premit trade in all state-contingent securities except insofar as governments restrict these markets. The restrictions we examine take the form of taxes or quantitative controls on purchases of foreign currency and on the income from foreign assets. State-contingent financial markets allow households to allocate wealth optimally across states so that the imposition of exchange and capital controls has, roughly speaking, only substitution effects but no wealth effect. These restrictions reduce international trade in goods and lower ex-post welfare in the country in which they are imposed. Nominal prices and exchange rate are nonmonotonic functions of these restrictions.
Keywords: exchange controls; capital controls; international financial markets; general equilibrium; rational expectations
JEL Codes: F3; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Exchange controls (F33) | domestic consumption of foreign goods (E20) |
| Exchange controls (F33) | relative price of foreign goods (F31) |
| Capital controls (F38) | domestic consumption of foreign goods (E20) |
| Anticipated changes in government policies (G18) | household behavior (D10) |
| household behavior (D10) | resource allocation (H61) |
| Government policies (H59) | prices and resource allocation (P22) |