When Liberal Policies Reflect External Shocks, What Do We Learn?

38 Pages Posted: 10 Jun 2000 Last revised: 4 Oct 2010

See all articles by Leonardo Bartolini

Leonardo Bartolini

Deceased

Allan Drazen

University of Maryland - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: August 1996

Abstract

We present a model where policies of free capital mobility can signal governments' future policies, but the informativeness of the signal depends on the path of world interest rates. Capital flows to emerging markets reflect investors' perception of these markets' political risk. With low world interest rates, emerging markets experience a capital inflow and engage in a widespread policy of free capital mobility; with higher rates, only sufficiently committed countries allow free capital mobility, whereas others impose controls to trap capital onshore, thus signaling future policies affecting capital mobility. These predictions are consistent with the recent experience of capital flows and policies affecting capital mobility in developing countries.

Suggested Citation

Bartolini (deceased), Leonardo and Drazen, Allan, When Liberal Policies Reflect External Shocks, What Do We Learn? (August 1996). NBER Working Paper No. w5727. Available at SSRN: https://ssrn.com/abstract=225584

Allan Drazen

University of Maryland - Department of Economics ( email )

College Park, MD 20742-1815
United States
301-405-3477 (Phone)
301-405-7835 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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