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Capital controls and the political discount: The Spanish experience in the late 1980s

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  • Philippe Bacchetta

Abstract

This article examines the wedge between Madrid and London peseta interest rates in the late 1980s, when controls on capital inflows were imposed. A model of onshore and offshore markets and of arbitrage between the two is proposed, where arbitrage has a dynamic structure caused by the process of controls avoidance. The model implies, first, that the wedge can follow an ARMA process and, second, that onshore and offshore rates can be cointegrated and can adjust according to an error correction mechanism. These models are consistent with the data and show that the monetary independence given by the controls was limited. Copyright Kluwer Academic Publishers 1996

Suggested Citation

  • Philippe Bacchetta, 1996. "Capital controls and the political discount: The Spanish experience in the late 1980s," Open Economies Review, Springer, vol. 7(4), pages 349-369, October.
    • Handle: RePEc:kap:openec:v:7:y:1996:i:4:p:349-369
    DOI: 10.1007/BF01886369
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    8. Gros, Daniel, 1992. "Capital controls and foreign exchange market crises in the EMS," European Economic Review, Elsevier, vol. 36(8), pages 1533-1544, December.
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    10. Daniel Gros, 1987. "The Effectiveness of Capital Controls: Implications for Monetary Autonomy in the Presence of Incomplete Market Separation," IMF Staff Papers, Palgrave Macmillan, vol. 34(4), pages 621-642, December.
    11. Bacchetta, Philippe, 1990. "Temporary capital controls in a balance-of- payments crisis," Journal of International Money and Finance, Elsevier, vol. 9(3), pages 246-257, September.
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    Cited by:

    1. Buch, Claudia M. & Heinrich, Ralph P. & Piazolo, Daniel, 1998. "Southern enlargement of the European Union and capital account liberalization: Lessons for Central and Eastern Europe," Kiel Working Papers 871, Kiel Institute for the World Economy (IfW Kiel).
    2. Antzoulatos, Angelos A., 2002. "Arbitrage opportunities on the road to stabilization and reform," Journal of International Money and Finance, Elsevier, vol. 21(7), pages 1013-1034, December.

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    More about this item

    Keywords

    capital controls; country premium; F32; F36;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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