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
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 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) |