Capital Mobility and Exchange Market Intervention in Developing Countries

62 Pages Posted: 13 Jul 2000 Last revised: 7 Oct 2010

See all articles by Michael P. Dooley

Michael P. Dooley

University of California at Santa Cruz; National Bureau of Economic Research (NBER)

Donald J. Mathieson

International Monetary Fund (IMF)

Liliana Rojas-Suarez

Center for Global Development

Multiple version iconThere are 2 versions of this paper

Date Written: October 1997

Abstract

This paper develops a new technique for measuring changes in the degree of capital mobility confronting a developing country that has restrictions on capital flows and official ceilings on domestic interest rates. Because such official controls rule out the use of traditional interest rate parity conditions to measure changes in the degree of capital mobility, the analysis first examines an intertemporal model of an open economy. This model describes the linkages between the cost of undertaking disguised capital flows, the current account, capital controls, domestic and external financial market conditions, and the authorities' foreign exchange market interventions. The model suggests a means of measuring changes in the cost of undertaking disguised capital flows, based on the past history of differentials between external interest rates (adjusted for exchange rate changes) and domestic ceiling interest rates, provided that the authorities' foreign exchange market activities are incorporated into the analysis. Parameter estimates for Korea, Mexico, and the Philippines indicate that the real cost of undertaking disguised capital flows declined on average by nearly 70 percent between the early 1970s and the late 1980s.

Suggested Citation

Dooley, Michael P. and Mathieson, Donald J. and Rojas-Suarez, Liliana, Capital Mobility and Exchange Market Intervention in Developing Countries (October 1997). NBER Working Paper No. w6247, Available at SSRN: https://ssrn.com/abstract=226005

Michael P. Dooley (Contact Author)

University of California at Santa Cruz ( email )

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Donald J. Mathieson

International Monetary Fund (IMF) ( email )

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Liliana Rojas-Suarez

Center for Global Development ( email )

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