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)| false “ Cumby, Robert E.and Maurice Obstfeld, Capital Mobility and the Scope for Sterilization: Mexico in the 1970’s,” in Financial Policies and the World Capital Markets: The Problem of Latin American Countries, edited by ( P. Aspe Armella, R. Dornbuschand M. Obstfeld Chicago and London: The University of Chicago Press, 1988).
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The authors are grateful to Vittorio Corbo, William Easterly and Mohsin Khan for comments and suggestions on earlier drafts.
See IMF (1989) for a description of capital controls in member countries.
As is evident from this discussion, we regard the degree of arbitrage between domestic and foreign market-determined interest rates—rather than the magnitude of gross capital flows—as the economically meaningful definition of capital mobility. By this definition, capital could in effect be perfectly mobile even if the actual direction of capital flows is asymmetric. For example, suppose that the government is a large net borrower abroad while the private sector is a net lender, as has been the case in several large Latin American countries. Then fluctuations in the size of private capital outflows could effectively maintain interest arbitrage, without requiring any actual private capital inflows. In this case, private outflows would be large when domestic monetary conditions are loose relative to those abroad and small when domestic monetary conditions are relatively tight.
Notice that the lagged variable in equation (6) is log (M/P)-1 rather than log (M’/T)-l. The reason is that the current demand for money in equation (4) depends on the actual money stock in the previous period, rather than on the money stock that would hypothetically have emerged with zero cumulative private capital mobility up to the previous period.
Edwards and Khan limited their study to Colombia and Singapore, for which market-determined interest rate data were available.
Low-income countries are defined in the World Economic Outlook of the International Monetary Fund as those with per capita income less than $425. In our sample these include India, Kenya, Sri Lanka, and Zambia. The three heavily-indebted countries in our sample (Brazil, Morocco, and the Philippines) are drawn from the category of the fifteen heavily indebted countries as defined in the World Economic Outlook.
Specifically, we use the errors-in-variables approach to rational-expectations estimation (see Wickens (1982)).
Note that semi-elasticity is obtained by multiplying α1 by 100, since the interest rate was entered in terms of percentage points.
In these cases the point estimate is also generally smaller in magnitude than the point estimate in countries where perfect capital mobility cannot be ruled out.
On the basis of generally-accepted priors, India would have been one of the countries where capital immobility would have been expected, as is in fact suggested by the test. In general, the test seems to have discriminated fairly well, relative to generally-accepted priors, for the group of countries in the sample.
In fact, the fairly uniform value of the estimate of ip across countries, as well as the absence of serial correlation in all but one equation, suggest to us that variations in the degree of capital mobility for individual countries, while undoubtedly present, are unlikely to have been large.