Article1980

Capital Controls, Political Risk, and Deviations from Interest-Rate Parity

329 citations0/0 files storedJournal of Political Economy

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Global Financial Crisis and Policies Monetary Policy and Economic Impact Economic, financial, and policy analysis

Abstract

It is shown that the interest differential due to political risk, given the prospect of future capital controls, depends essentially on the gross stocks of debt outstanding against different governments and the distribution of world wealth among residents of different political jurisdictions. A simple model of portfolio behavior is used to explain the differential between Euromark rates and interest rates within Germany in the presence of controls on capital flows into Germany between 1970 and 1974. The explanation separates the interest differential into the effective tax imposed by existing controls and a political risk premium associated with prospective controls.

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References

1924A Tract on Monetary Reform 1973The Interest Rate Parity Theorem: A Reinterpretation

Cited by

1985International Capital Mobility and Crowding Out in the U.S. Economy: Imperfect Integration of Financial Markets or of Goods Markets?1986Taxation of Investment and Savings in a World Economy 1996A Survey of Literature on Controls over International Capital Transactions 2006Political risk and capital flight 2007The impact of globalization on the composition of government expenditures: Evidence from panel data 1998Capital Account Liberalization: Theoretical and Practical Aspects 1988Some tests of international equity integration 2006Capital Controls, Liberalizations, and Foreign Direct Investment

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