{
  "title": "Capital Controls and Trade Liberalization in a Monetary Economy",
  "publication": "IMF Working Papers, March 1, 1999",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/capital-controls-and-trade-liberalization-in-a-monetary-economy-2895",
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  "summary": "This paper reexamines Aizenman’s (1985) results on the effects of capital controls during unanticipated trade liberalization using an intertemporal optimizing monetary model.",
  "sections": [
    {
      "heading": "Summary",
      "content": "- Reexamines Aizenman’s (1985) results on the effects of capital controls during unanticipated trade liberalization using an intertemporal optimizing monetary model.\n- Modifies Aizenman’s currency substitution framework by treating foreign money as an interest-bearing asset whose major role is to smooth intertemporal consumption.\n- Finds that with this modification, Aizenman’s results are reversed, indicating that the effects of capital controls during trade liberalization vary greatly depending on the role of foreign money in a country.\n- Also studies the effects of an anticipated trade liberalization."
    },
    {
      "heading": "Main findings",
      "content": "- The role attributed to foreign money (currency substitution model vs. interest-bearing asset smoothing consumption) critically determines the direction of the effects of capital controls during trade liberalization.\n- Under the model where foreign money is an interest-bearing asset, conclusions opposite to Aizenman (1985) emerge regarding capital controls during unanticipated trade liberalization.\n- The paper extends analysis to anticipated trade liberalization and its distinct effects relative to unanticipated liberalization."
    },
    {
      "heading": "Methodology and assumptions",
      "content": "- Uses an intertemporal optimizing monetary model.\n- Contrasts the currency substitution model (as used by Aizenman) with a framework in which foreign money is an interest-bearing asset that smooths intertemporal consumption."
    },
    {
      "heading": "Policy implications",
      "content": "- Policy conclusions about capital controls during trade liberalization are not robust to assumptions about the monetary role of foreign money.\n- Policymakers should account for the functional role of foreign money in the economy (currency substitution versus interest-bearing asset) when evaluating the likely effects of capital controls associated with trade liberalization.\n- Distinctions between unanticipated and anticipated trade liberalization matter for assessing capital control policies.\n\n---\n\n Content in this bundle\n\n- Capital Controls and Trade Liberalization in a Monetary Economy - WP/99/24\n  - Capital Controls and Trade Liberalization in a Monetary Economy - WP/99/24 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Capital Controls and Trade Liberalization in a Monetary Economy - WP/99/24 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/capital-controls-and-trade-liberalization-in-a-monetary-economy-2895"
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    "Authors: B. Jang",
    "Published: March 1, 1999",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451844122.001",
    "Reexamines Aizenman’s (1985) results on the effects of capital controls during unanticipated trade liberalization using an intertemporal optimizing monetary model.",
    "Modifies Aizenman’s currency substitution framework by treating foreign money as an interest-bearing asset whose major role is to smooth intertemporal consumption.",
    "Finds that with this modification, Aizenman’s results are reversed, indicating that the effects of capital controls during trade liberalization vary greatly depending on the role of foreign money in a country.",
    "Also studies the effects of an anticipated trade liberalization.",
    "The role attributed to foreign money (currency substitution model vs. interest-bearing asset smoothing consumption) critically determines the direction of the effects of capital controls during trade liberalization.",
    "Under the model where foreign money is an interest-bearing asset, conclusions opposite to Aizenman (1985) emerge regarding capital controls during unanticipated trade liberalization.",
    "The paper extends analysis to anticipated trade liberalization and its distinct effects relative to unanticipated liberalization.",
    "Uses an intertemporal optimizing monetary model.",
    "Contrasts the currency substitution model (as used by Aizenman) with a framework in which foreign money is an interest-bearing asset that smooths intertemporal consumption.",
    "Policy conclusions about capital controls during trade liberalization are not robust to assumptions about the monetary role of foreign money.",
    "Policymakers should account for the functional role of foreign money in the economy (currency substitution versus interest-bearing asset) when evaluating the likely effects of capital controls associated with trade liberalization.",
    "Distinctions between unanticipated and anticipated trade liberalization matter for assessing capital control policies.",
    "**Capital Controls and Trade Liberalization in a Monetary Economy - WP/99/24**"
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