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Real Exchange Rate Overshooting and Capital Controls in a Crisis

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  • Joshua Aizenman

Abstract

This paper investigates the impact of a financial crisis on the attitude towards financial reforms, in an economy partially integrated with the global capital market. I identify conditions under which a crisis induces greater financial openness, mitigating the real exchange rate overshooting. The welfare gains from alleviating the shortage of funds in the sort run should be balanced with the cost of selling domestic equities at a discount. Even if the net gain from opening up the capital market is significant, it will exceed the gain from temporary capital controls only if the FDI is associated with significant favourable productivity effects. JEL Classification Numbers: F21, F23, F32, F34, F36.

Suggested Citation

  • Joshua Aizenman, 2001. "Real Exchange Rate Overshooting and Capital Controls in a Crisis," The Japanese Economic Review, Japanese Economic Association, vol. 52(4), pages 417-428, December.
    • Handle: RePEc:bla:jecrev:v:52:y:2001:i:4:p:417-428
    DOI: 10.1111/1468-5876.00204
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    Cited by:

    1. Havi, Emmanuel Dodzi Kutor, 2021. "The impact of exchange rate volatility on foreign direct investment inflows in Ghana," African Journal of Economic Review, African Journal of Economic Review, vol. 9(4), September.

    More about this item

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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