TY  - JOUR
AU  - Bartolini,Leonardo
AU  - Drazen,Allan
TI  - When Liberal Policies Reflect External Shocks, What Do We Learn?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5727
PY  - 1998
Y2  - March 1998
UR  - http://www.nber.org/papers/w5727
L1  - http://www.nber.org/papers/w5727.pdf
N1  - Author contact info:
Leonardo Bartolini
Federal Reserve Bank of New York
33 Liberty Street
New York, NY  10045
E-Mail: leo.bartolini@ny.frb.org

Allan Drazen
Department of Economics
University of Maryland
College Park, MD 20742
Tel: 301/405-3477
Fax: 301/405-7835
E-Mail: drazen@econ.umd.edu
AB  - We present a model where policies of free capital mobility can signal governments' future policies, but the informativeness of the signal depends on the path of world interest rates. Capital flows to emerging markets  reflect investors' perception of these markets' political risk.  With low world interest rates, emerging markets experience a capital inflow and engage in a widespread policy of free capital mobility; with higher rates, only sufficiently committed countries allow free capital mobility, whereas others impose controls to trap capital onshore, thus signaling future policies affecting capital mobility.  These predictions are consistent with the recent experience of capital flows and policies affecting capital mobility in developing countries.
ER  -