Capital Mobility and Exchange Market Intervention in Developing Countries

Abstract:     
Official controls on interest rates and capital flows have ruled out the use of traditional interest rate parity conditions to measure changes in the degree of capital mobility confronting developing countries. This paper develops an alternative technique for measuring the cost of undertaking disguised capital flows when such official controls are present. This measure is derived in the context of an intertemporal, optimizing model of an open economy that incorporates the influence of the authorities' monetary and exchange market intervention policies. Parameter estimates for Korea, Mexico and the Philippines indicate that the real cost of undertaking disguised capital flows declined, on average, by nearly 70 percent between the early 1970s and the late 1980s.

JEL Classification: F32, F34

working papers series