Capital Controls,Public Debt and Currency Crises |
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Authors: | Shigeto Kitano |
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Institution: | (1) Faculty of Economics, Wakayama University, 930 Sakaedani, Wakayama City 640-8510, Japan |
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Abstract: | This paper examines the possibility that, contrary to conventional wisdom, capital controls accelerate currency crises. Theoretical
analysis shows that capital controls can constitute an additional burden on government budget and so bring forward the onset
of crises. Since perfect capital mobility does not occur, domestic interest rates may deviate from world interest rates. High
interest rates under capital controls create an additional cost of servicing outstanding domestic public debt, precipitating
crises. Even though the government can delay crises with capital controls, welfare may be less than in a situation with perfect
capital mobility. |
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Keywords: | capital controls public debt currency crises |
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