DP343 Capital Controls and International Trade Finance

Author(s): Alberto Giovannini, Jae Won Park
Publication Date: November 1989
Keyword(s): Asset Markets, Capital Controls, Financial Markets, Foreign Assets
JEL(s): 311, 313, 321, 441
Programme Areas: International Macroeconomics, Applied Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=343

This paper studies the effects of prohibiting individuals from holding foreign assets, and of allowing firms to trade in foreign assets only up to what is needed to finance export and import activities. Although firms can perform arbitrage between domestic and foreign financial markets, this arbitrage does not eliminate the distortions in asset markets; instead, the distortions are transmitted to the domestic goods market. The paper discusses the effects of shocks in foreign financial markets and in domestic fiscal policy. We show that both the dynamics and steady states are crucially affected by capital controls.