Self-Fulfilling Expectations, Speculative Attacks, and Capital Controls

Working Paper: NBER ID: w2625

Authors: Harris Dellas; Alan C. Stockman

Abstract: This paper examines the endogenous implementation of capital controls in the context of a fixed exchange rate regime. It is shown that if there exists a non-zero probability that the policymaker's response to a speculative attack on official foreign reserves will be the introduction of controls, such an attack may occur even when current and expected monetary policy is consistent with a permanently viable, control-free fixed exchange rate regime. Consequently, capital controls may be the outcome of self- fulfilling expectations rather than the result of imprudent economic policies.

Keywords: No keywords provided

JEL Codes: No JEL codes provided


Causal Claims Network Graph

Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.


Causal Claims

CauseEffect
Expectations of policymakers' responses to speculative attacks (E63)Occurrence of speculative attacks (D84)
Perceived probability of capital controls being imposed (F38)Likelihood of speculative attacks (D84)
Threat of capital controls (F38)Speculative attacks (D84)
External credibility (e.g., IMF support) (F34)Domestic monetary stability (E63)
Expectations of future policy changes (D84)Rational behavior of individuals (D01)

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