APPENDIX: Developments in Capital Control and Capital Movements
The following discussion of developments in restrictions on outward and inward capital movements is based on the Annual Report on Exchange Arrangements and Exchange Restrictions (various issues), OECD (1982), and Eken (1984).
Bisignano, Joseph, and Kevin D. Hoover, “Monetary and Fiscal Impacts on Exchange Rates,” Economic Review, Federal Reserve Bank of San Francisco (Winter 1982), pp. 19–36.
Dornbusch, Rudiger (1976a), “Expectations and Exchange Rate Dynamics,” Journal of Political Economy, (Chicago), Vol. 84 (December 1976) pp. 1161–76.
Dornbusch, Rudiger (1976b), “The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy,” Scandinavian Journal of Economics (Stockholm) Vol. 78, No. 2 (1976), pp. 255–75.
Eken, Sena, “lntegration of Domestic and International Financial Markets: The Japanese Experience,” Staff Papers, International Monetary Fund (Washington), Vol. 31, No. 3 (September 1984), pp. 499–548.
Frankel, Jeffrey, “On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Rate Differentials,” American Economic Review, Vol. 69 (September 1979), pp. 610–22.
Frenkel, Jacob A., “A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence,” Scandinavian Journal of Economics (Stockholm), Vol. 78, No. 2 (1976), pp. 200–24.
Heller, Peter S., Richard Haas, and Ahsan Mansur, A Review of the Fiscal Impulse Measure, Occasional Paper No. 44, International Monetary Fund, (Washington, May 1986).
Islam, Shafiqul, “Fiscal Policy and the Dollar: Does the C-5 Need Gramm-Rudman?”, Federal Reserve Board of New York (unpublished, February 1986).
Mansur, Ahsan H., “Divergence in Policy Mixes and Appreciation of the Dollar: A Partial Equilibrium Asset Market Approach,” (unpublished, International Monetary Fund 1987).
Menil, George de, and Anthony M. Solomon, Economic Summitry, Council of Foreign Relations (New York: Council of Foreign Relations, 1983).
Mussa, Michael, “The Exchange Rate, The Balance of Payments, and Monetary and Fiscal Policy Under a Regime of Controlled Floating,” Scandinavian Journal of Economics (Stockholm), Vol. 78, No. 2 (1976), pp. 229–48.
Organization for Economic Cooperation and Development, Controls on International Capital Movements: The Experience with Controls on International Financial Credits, Loans, and Deposits, (Paris: OECD, 1982).
Ostry, Sylvia, “The World Economy in 1983: Marking Time,” America and the World, 1983, special issue, Foreign Affairs (New York), Vol. 62, No. 3 (1984), pp. 533–60.
Oudiz, Gilles and Jeffrey Sachs, “Macroeconomic Policy Coordination Among the Industrial Economies,” Brookings Papers on Economic Activity: 1 (1984) The Brookings Institution (Washington), pp. 1–64.
Sachs, Jeffrey, “The Dollar and the Policy Mix: 1984,” Working Paper No. 1636, National Bureau of Economic Research, Inc. (Cambridge, Mass., June 1985).
Stewart, Michael, The Age of Interdependence: Economic Policy in a Shrinking World (Massachussets: Massachussets Institute of Technology Press, 1984).
Tanzi, Vito “Deficit Experience in Industrial Countries,” in The Economy in Deficit, Essays in Contemporary Economic Problems, ed. by Phillip Cagan, American Enterprise Institute (Washington, 1985), pp. 81–119.
Tanzi, Vito, and Teresa Ter-Minassian, “The European Monetary System and Fiscal Policies,” in Tax Coordination in the European Community, ed. by Sijbren Cnossen, Series on International Taxation, Kluwer No. 7 (1987), pp. 337–60.
The author thanks Messrs. Mario I. Blejer, Ke-young Chu, Alain Ize, and Vito Tanzi for useful comments on an earlier draft, although he alone is responsible for the views expressed and for any remaining errors. Mrs. Ziba Farhadian-Lorie provided valuable computational assistance.
The objective, which was only partly achieved, was to avoid deflationary policies.
Similar observations were noted for the countries within the European Monetary System by Tanzi and Ter-Minassian (1987).
The cumulative deterioration of fiscal positions during 1979-85, which is attributable to purely cyclical factors, is estimated to be between 3 percent and 6 percent of GNP for the European economies, 1.7 percent for the United States, and only 0.4 percent for Japan. For more on the methodology used in deriving these estimates, see Heller, Haas, and Mansur (1986), and World Economic Outlook (April 1986).
The fiscal deficits through 1985 are discussed because these were most probably anticipated by the financial community by 1984 and were reflected in interest rates and exchange rate developments in 1984.
Code of Liberalization of Capital Movements, OECD, 1961 (March 1982 edition).
For more on developments in restrictions on outward and inward capital movements and the overall effects of capital market liberalization, see the Appendix.
For example, in the case of the United States, except to the extent that the Federal Reserve makes purchases of Treasury debt in the open market in the course of its normal reserve-supplying operations, it does not play a role in the financing of budget deficits.
This independence between monetary and fiscal, policy is crucial for the ratio of government bonds to reserve money or money stock, to serve as a useful indicator of policy mix. In most developing countries, where the government borrowing requirements are met by borrowing directly from the central banks, both the monetary base and broadly defined money stock would increase by the same amount and, thus, the proposed ratio would not serve as a satisfactory indicator of policy mix.
In fact, in some years the stock of reserve money declined or increased only marginally, allowing for negative ratios (e.g., in the Federal Republic of Germany during 1980/81) or a sharp increase in the ratio (e.g., in Japan in 1981).
Islam (1986) has described this development in greater detail. He notes that “the strong dollar worked as a lever, opening the safety valve of the U.S. current account deficit through which foreign funds flowed into the United States. In the end, it was not investment, but the tradable sectors that were crowded out”.
There were restrictions on the extent to which banks could fund foreign currency lending from sterling deposits or other sterling assets, which effectively limited the extent of speculation against sterling.
Yen-denominated long-term bonds issued by foreign borrowers in Japan through public offerings.
The regulations, however, contain several reporting and prior-notice provisions, as well as requirements for approval of some transactions. For details, see Japan Economic Institute (1984).