Working Paper: NBER ID: w2907
Authors: Sebastian Edwards; Jonathan D. Ostry
Abstract: Many arguments that have been advanced in favor of maintaining capital control within the EEC have not paid sufficient attention to the welfare consequences of this type of market intervention. Our paper provides a simple, optimizing framework in which the welfare consequences of capital controls can be assessed. Two main issues are considered. First, how do capital controls affect the adjustment of macroeconomic variables to real disturbances? Second, what is the nature of second best arguments for maintaining capital controls given that certain distortions will remain after the European single market is in place in 1992?
Keywords: Capital Controls; Real Exchange Rates; Welfare; Labor Market Distortions
JEL Codes: F32; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital controls (F38) | intertemporal consumption distortion (D15) |
| capital controls (F38) | welfare costs associated with macroeconomic disturbances (D69) |
| terms of trade shocks (F14) | welfare cost associated with disturbance (D69) |
| capital controls (F38) | adjustment to exogenous disturbances (C62) |
| real exchange rate movements (F31) | welfare effects of capital controls (F38) |
| capital controls (F38) | welfare-increasing in presence of labor market distortions (H31) |
| capital controls + labor market distortions (F16) | equilibrium real exchange rate (F31) |
| equilibrium real exchange rate (F31) | employment (J68) |