Can Capital Controls Alter the Inflation-Unemployment Tradeoff? / Assaf Razin, Chi-Wa Yuen.

Format:

Book

Author/Creator:

Razin, Assaf.

Contributor:

National Bureau of Economic Research.

Yuen, Chi-Wa.

Series:

Working Paper Series (National Bureau of Economic Research) no. w5239.

NBER working paper series no. w5239

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1995.

Summary:

It is well-known that, in the Mundell-Fleming model, capital mobility creates a channel through which permanent (transitory) shocks to aggregate demand such as fiscal and trade shocks are completely (partially) neutralized by the response of the real exchange rate. An important policy implication of the model which went largely unnoticed is how the transmission of these shocks under different degrees of capital mobility may alter the inflation-unemployment tradeoff, i.e., the Phillips Curve. In the context of the stochastic Mundell-Fleming model, we show that capital controls reduce the output/employment variations at the expense of bigger variations in inflation rates. When the policy maker puts heavier weight on stable employment than on stable inflation, therefore, his/her objective can be attained more easily under capital controls.

Notes:

Print version record

August 1995.