Working Paper: NBER ID: w2250
Authors: Daekeun Park; Jeffrey Sachs
Abstract: This paper investigates the nature of balance of payments crises in regimes with capital controls. It extends earlier work on capital controls by assuming that households manage their consumption and asset portfolios to maximize intertemporal utility. Our main result is that capital controls are effective in delaying, but not preventing, a breakdown of a fixed exchange rate regime in the presence of money-financed fiscal deficits.
Keywords: Capital Controls; Exchange Rate Regime; Balance of Payments Crises
JEL Codes: F31; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Capital Controls (F38) | Delay Collapse of Fixed Exchange Rate Regime (F31) |
| Fiscal Deficits Financed by Money Creation (E62) | Delay Collapse of Fixed Exchange Rate Regime (F31) |
| Capital Controls (F38) | Prevent Instantaneous Conversion of Domestic Currency into Foreign Assets (F31) |
| Capital Controls (F38) | Different Adjustment Mechanism Compared to Free Capital Mobility (F32) |
| Buildup of Real Money Balances (E49) | Increased Domestic Absorption (F35) |
| Increased Domestic Absorption (F35) | Current Account Deficits (F32) |
| Current Account Deficits (F32) | Reserve Losses (G33) |
| Reserve Losses (G33) | Collapse of Fixed Exchange Rate Regime (F31) |