Exchange controls as a fiscal instrument

Author / Creator

Schmitt-Grohe, Stephanie

Available as

Online

Summary

About 20 percent of countries have in place dual, multiple, or parallel exchange rates. Exchange controls represent a form of distortionary commercial policy. We show that they can also deflate the...

About 20 percent of countries have in place dual, multiple, or parallel exchange rates. Exchange controls represent a form of distortionary commercial policy. We show that they can also deflate the real value of external public debt. We study an optimal taxation problem of a government with chronic fiscal deficits and two distortionary instruments, money creation and exchange controls. We calibrate the model to Argentina, which over the past decade has experienced significant exchange controls and persistent fiscal deficits. We show that exchange controls can generate sizable fiscal revenue. However, the optimal level of exchange controls is virtually zero. Financing the fiscal deficit with exchange controls is possible but entails large welfare losses.

Show More