The essays collected in this volume, written by well-known academics and policy analysts, discuss the impact of increased capital mobility on macroeconomic per- formance. The authors highlight the most adequate ways to manage the transition from a semi-closed economy to a semi-open one. Additionally, issues related to the measurement of openness, monetary control, optimal exchange rate regimes, sequencing of reforms, and real exchange rate dynamics under different degrees of capital mobility are carefully analyzed. The book is divided in four parts after the editor's introduction. The first part contains the general analytics of monetary policy in open economies. Parts two to four deal with diverse regional experiences, covering Europe, the Asian Pacific region, and Latin America. The papers on which the essays are based were origi- nally presented at a conference on Monetary Policy in Semi-Open Economies, held at the Institute of Economic Research, Korea University in Seoul, Korea, in November 1992. Capital controls, exchange rates, and monetary policy in the world economy Capital controls, exchange rates, and monetary policy in the world economy Edited by SEBASTIAN EDWARDS University of California, Los Angeles The World Bank CAMBRIDGE UNIVERSITY PRESS PUBLISHED BY THE PRESS SYNDICATE OF THE UNIVERSITY OF CAMBRIDGE The Pitt Building, Trumpington Street, Cambridge CB2 1RP CAMBRIDGE UNIVERSITY PRESS The Edinburgh Building, Cambridge CB2 2RU, United Kingdom 40 West 20th Street, New York, NY 10011-4211, USA 10 Stamford Road, Oakleigh, Melbourne 3166, Australia © Cambridge University Press 1995 This book is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 1995 Reprinted 1997 First paperback edition 1997 Library of Congress Catalo gin g-in-Publi cation Data is available. A catalog record for this book is available from the British Library. ISBN 0-521-47228-8 hardback ISBN 0-521-59711-0 paperback Transferred to digital printing 2004 Contents List of contributors page vii Introduction 1 Sebastian Edwards Part I. Monetary policy and stabilization in open economies 1. Stabilization and liberalization policies in semi-open economies 19 Robert Mundell 2. Monetary regime choice for a semi-open country 35 Jeffrey A. Frankel 3. Capital account liberalization: bringing policy in line with reality 71 Manuel Guitidn Part II. Capital mobility and macroeconomic policy in Europe 4. The lessons of European monetary and exchange rate experience 93 Patrick Minford 5. Experience with controls on international capital movements in OECD countries: solution or problem for monetary policy? 119 Jeffrey R. Shafer 6. Real exchange rates and capital flows: EMS experiences 157 Alberto Giovannini 7. Monetary policy after German unification 181 Wilhelm Nolling vi Contents Part III. Capital controls and macroeconomic policy in the Asia-Pacific region 8. Capital movements, real asset speculation, and macroeconomic adjustment in Korea 199 Yung Chul Park and Won-Am Park 9. The determinants of capital controls and their effects on trade balance during the period of capital market liberalization in Japan 229 Shin-ichi Fukuda 10. Capital mobility and economic policy 247 Michael Dooley 11. Monetary and exchange rate policies 1973-1991: the Australian and New Zealand experience 265 Victor Argy Part IV. Capital mobility and exchange rates in Latin America 12. Exchange rates, inflation, and disinflation: Latin American experiences 301 Sebastian Edwards 13. Capital inflows to Latin America with reference to the Asian experience 339 Guillermo A. Calvo, Leonardo Leiderman, and Carmen M. Reinhart 14. Opening the capital account: costs, benefits, and sequencing 383 James A. Hanson Index 431 Contributors Victor Argyf Shin-ichi Fukuda School of Economics and Social The Institute of Economic Research Studies Hitotsubashi University Macquarie University, Sydney Alberto Giovannini Guillermo A. Calvo Graduate School of Business Department of Economics Columbia University and University of Maryland National Bureau of Economic Re- Michael Dooley search Department of Economics Manuel Guitian University of California, Santa Cruz Director, Monetary and Exchange and Affairs Department National Bureau of Economic Re- International Monetary Fund search James A. Hanson Sebastian Edwards Resident Mission in Indonesia- Anderson Graduate School of Man- Jakarta agement The World Bank University of California, Los Leonardo Leiderman Angeles Department of Economics The World Bank and Tel Aviv University National Bureau of Economic Re- search Patrick Minford Department of Economics and Ac- Jeffrey Frankel counting Department of Economics University of Liverpool and University of California, Berkeley Cardiff Business School Institute for International Economics and Robert Mundell National Bureau of Economic Re- Department of Economics search Columbia University * Deceased. vn