No. 131 - Are asymmetric exchange controls effective?

In the seventies, a number of industrial countries made recourse to asymmetric exchange controls, i.e., to administrative measures aimed at restraining outflows of domestic capital. During the eighties, a process of liberalization was underway and the issue arose of its macroeconomic impact. In this paper we analyze asymmetric exchange controls with different hypotheses regarding three key aspects: (i) the domestic policy mix; (ii) the degree of substitutability between domestic and foreign assets; (iii) the financial size of the economy. We find that the macroeconomic effectiveness of exchange controls is reduced, at the limit to nothing: (i) as the country concerned follows a strict monetary policy or a lax fiscal policy; (ii) as domestic and foreign assets tend to be perfect substitutes; (iii) as the domestic economy represents a small segment of an integrated (but for controls) financial market.