Self-Fulfilling Expectations, Speculative Attack, and Capital Controls

Harris Dellas · Alan C. Stockman

52 citations0/0 files storedJournal of money credit and banking

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Global Financial Crisis and Policies Monetary Policy and Economic Impact Economic theories and models

Abstract

This paper examines the endogenous implementation of capital controls in the context of a fixed exchange rate regime. It is shown that if there exists a nonzero probability that the policymaker's response to a significant decrease in official foreign reserves will be the introduction of controls, a speculative attack may occur even when current and expected monetary policy is consistent with a permanently viable, control-free, fixed exchange rate regime. Consequently, capital controls may be the outcome of self-fulfilling expectations rather than the result of imprudent economic policies. Copyright 1993 by Ohio State University Press.

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References

1984Collapsing exchange-rate regimes 1984Rational and Self-Fulfilling Balance-of-Payments Crises 1989Servicing the Public Debt: The Role of Expectations* *I have greatly benefited from comments received at Johns Hopkins University, Georgetown University, the Macro Lunch Group of the University of Pennsylvania, MIT, and the Research Department of the International Monetary Fund. I am particularly indebted to Matt Canzoneri, Sara Guerschanik-Calvo, Joseph Harrington, Jr, Elhanan Helpman, Nissan Leviatan, Maury Obstfeld, Assaf Razin, Sweder van Wijnbergen and two anonymous referees. The research on this paper was partly done while I was a visiting scholar at the Research Department of the Internationed Monetary Fund, and it was partially funded by the National Science Foundation. However, any opinions expressed are entirely my own and not those of any of the above institutions. This paper has already been published in the The American Economic Review, 78, 4, September 1988, pp. 647–661.1987Public Debt Guarantees and Private Capital Flight 1988The international monetary system 1989Voluntary Debt Reduction: Incentives and Welfare 1988Real exchange-rate variability under pegged and floating nominal exchange-rate systems: An equilibrium theory

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2000Restraining International Capital Movements: What Does it Mean?2000Government bailouts and monetary disequilibrium: common fundamentals in the Mexican and East Asian currency crises 1995Economic Effects and Structural Determinants of Capital Controls

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