Capital Controls and the Timing of Exchange Regime Collapse
Daekuen Park, Jeffrey Sachs
NBER Working Paper No. 2250
Issued in May 1987
NBER Program(s):International Trade and Investment, International Finance and Macroeconomics
This paper investigates the nature of balance of payments crises in regimes with capital controls. It extends earlier work on capital controls by assuming that households manage their consumption and asset portfolios to maximize intertemporal utility. Our main result is that capital controls are effective in delaying, but not preventing, a breakdown of a fixed exchange rate regime in the presence of money-financed fiscal deficits.