Can Capital Controls Alter the Inflation-Unemployment Tradeoff?

21 Pages Posted: 14 Jul 2000

See all articles by Assaf Razin

Assaf Razin

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Chi-Wa Yuen

The University of Hong Kong - School of Economics and Finance

Date Written: August 1995

Abstract

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.

Suggested Citation

Razin, Assaf and Yuen, Chi-Wa, Can Capital Controls Alter the Inflation-Unemployment Tradeoff? (August 1995). NBER Working Paper No. w5239. Available at SSRN: https://ssrn.com/abstract=225303

Assaf Razin (Contact Author)

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 7303 (Phone)
+972 3 640 9908 (Fax)

National Bureau of Economic Research (NBER) ( email )

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United States

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Chi-Wa Yuen

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong
+8 52 2859 1051 (Phone)
+8 52 7548 1152 (Fax)

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