Capital Account Liberalization as a Signal
Federal Reserve Bank of New York, 1996 - Banks and banking, Central - 46 pages
This paper presents a model in which a government's current capital controls policy signals future policies. Controls on capital outflows evolve in response to news on technology, contingent on government attitudes towards taxation of capital. When there is uncertainly over government typos, a policy of liberal capital outflows sends a positive signal that may trigger a capital outflow. This prediction is consistent with the experience of several countries that have recently liberalized their capital account.
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affecting capital mobility Alesina allow free capital analysis asymmetric information Bartolini beginning of period binding controls capital controls policies capital onshore capital outflows ceteris paribus concavity constraint controls are imposed controls in period controls on capital controls on inflows correlated denote domestic capital Economic episode equilibrium prevails European Monetary System exchange rate Federal Reserve Bank financial repression free capital mobility free mobility function future policies Giavazzi Giovannini government behavior Government chooses government types government's hence impose capital controls impose controls imposed in period incentives indicator function investing onshore Liberalization of Capital liberalize capital flows mobility in period Monetary offshore returns open capital account percent of GDP Perfect Bayesian Equilibrium policies affecting capital posterior probability predictions prevailing in period prior probability probability of controls regime of free return from investing Section signaling equilibrium stock of domestic stylized facts tax base technology shock trap capital two-period Uruguay utility Zealand