Collateral Damage : Exchange Controls and International Trade

Author/Editor:

Zhiwei Zhang ; Shang-Jin Wei

Publication Date:

January 1, 2007

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

While new conventional wisdom warns that developing countries should be aware of the risks of premature capital account liberalization, the costs of not removing exchange controls have received much less attention. This paper investigates the negative effects of exchange controls on trade. To minimize evasion of controls, countries often intensify inspections at the border and increase documentation requirements. Thus, the cost of conducting trade rises. The paper finds that a one standard-deviation increase in the controls on trade payment has the same negative effect on trade as an increase in tariff by about 14 percentage points. A one standard-deviation increase in the controls on FX transactions reduces trade by the same amount as a rise in tariff by 11 percentage points. Therefore, the collateral damage in terms of foregone trade is sizable.

Series:

Working Paper No. 07/8

Subject:

English

Publication Date:

January 1, 2007

ISBN/ISSN:

9781451865721/1018-5941

Stock No:

WPIEA2007008

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

27

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