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Self-fulfillment Expectations, Speculation Attacks, and Capitol Controls

Harris Dellas, Alan C. Stockman

NBER Working Paper No. 2625
Issued in June 1988
NBER Program(s):International Trade and Investment Program, International Finance and Macroeconomics Program

This paper examines the endogenous implementation of capital controls in the context of a fixed exchange rate regime. It is shown that if there exists a non-zero probability that the policymaker's response to a speculative attack on official foreign reserves will be the introduction of controls, such an attack may occur even when current and expected monetary policy is consistent with a permanently viable, control-free fixed exchange rate regime. Consequently, capital controls may be the outcome of self- fulfilling expectations rather than the result of imprudent economic policies.

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Document Object Identifier (DOI): 10.3386/w2625

Published: Dellas, Harris and Alan C. Stockman. "Self-Fulfilling Expectations, Speculative Attacks, And Capital Controls," Journal of Money, Credit and Banking, 1993, v25(4), 721-730.

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