MACROECONOMIC INTERDEPENDENCE UNDER CAPITAL CONTROLS - A 2-COUNTRY MODEL OF DUAL EXCHANGE-RATES

This paper studies the international transmission of monetary and fiscal disturbances under capital controls. The results are contrasted with those that obtain under perfect capital mobility. Under perfect capital mobility, permanent and unanticipated changes in domestic fiscal and monetary policies have no real effects abroad and the adjustment is instantaneous. In contrast, under capital controls, these disturbances are transmitted abroad and adjustment occurs only over time. The dynamic adjustment of the world economy is characterized by a negative co-movement of domestic and foreign variables, such as consumption, the real interest rate, and the real exchange rate.