Capital Controls and International Portfolio Theory: A Microeconomic Approach
IMF Working Papers, June 1, 1990
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- Capital Controls and International Portfolio Theory: A Microeconomic Approach
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Bibliographic details
- Authors: Marjorie B. Rose
- Published: June 1, 1990
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451970579.001
Summary
- This paper examines the effects of capital controls on asset prices.
- A closed-form valuation model by Eun and Janakirimanan (1986) is extended to analyze the impact of three restrictions on international portfolio investment:
- a percentage quantity constraint on the amount of foreign securities a domestic resident may hold in her portfolio;
- a constraint on the absolute amount of foreign securities a domestic resident may hold;
- a percentage tax on the domestic purchase price of a foreign security.
- Comparative statics and numerical analysis are used to reveal the effects of these distortions on domestic and world equilibrium prices.
Methods and Model
- Extension of a closed-form valuation model (Eun and Janakirimanan, 1986).
- Use of comparative statics.
- Use of numerical analysis to determine impacts on equilibrium prices.
Key Findings
- The paper characterizes how three types of restrictions (percentage portfolio constraint, absolute quantity constraint, and percentage tax on purchase price) distort international portfolio investment decisions.
- These distortions affect both domestic and world equilibrium prices (effects detailed through comparative statics and numerical examples in the paper).
Subject Areas and Keywords
- Subjects: Asset prices, Balance of payments, Capital markets, External position, Financial institutions, Financial markets, Foreign assets, Foreign direct investment, Prices, Securities
- Keywords: Asset prices, Capital markets, choice problem, Foreign assets, Foreign direct investment, foreign securities, information cost, percentage portfolio constraint, Securities, securities result, security demand, WP