Exchange rates intervention and capital mobility control

Capital Account Convertibility: A New Model for Developing Countries

“…If the use of official reserves is heavily discounted by market participants as temporary (owing to a low level of reserves or the central bank's unwillingness to expose itself to significant exchange losses on intervention), then the displacement from R Q R to R' Q R' in expected terms, and thus from e Q to e^ will be small and possibly insignificant. Chu and others (1986) deal with the interrelationship between exchange rate intervention and controls on capital mobility. They conclude that, notwithstanding the limitations of intervention, in a world where both domestic expenditure and external trade shocks exist, the short-run finetuning function of controls is best handled by exchange rate intervention.…”