Capital Controls, Collection Costs, and Domestic Public Debt

Joshua Aizenman, Pablo E. Guidotti

NBER Working Paper No. 3443
Issued in September 1990
NBER Program(s):   ITI   IFM

The implications of a large public debt for the implementation of capital controls for an economy where tax revenue collection is costly are examined. Conditions are analyzed under which policymakers will resort to capital controls to reduce the cost of recycling domestic public debt. The linkages between a costly tax collection mechanism, capital controls, am domestic government debt are explored in terms of a two-period m:x1el of optimal taxation. Numerical simulations are provided to illustrate haw capital controls are linked to different domestic public debt levels am to different degrees of efficiency in tax-revenue collection.

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Published: Journal of International Money and Finance, Vol. 13, no. 1, pp. 41-54, (February 1994).

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