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Christian Saborowski, Sarah Sanya, Hans Weisfeld, and Juan Yepez
This paper examines the effectiveness of capital outflow restrictions in a sample of 37 emerging market economies during the period 1995-2010, using a panel vector autoregression approach with interaction terms. Specifically, it examines whether a tightening of outflow restrictions helps reduce net capital outflows. We find that such tightening is effective if it is supported by strong macroeconomic fundamentals or good institutions, or if existing restrictions are already fairly comprehensive. When none of these three conditions is fulfilled, a tightening of restrictions fails to reduce net outflows as it provokes a sizeable decline in gross inflows, mainly driven by foreign investors.
Mr. Helge Berger and Mr. Henning Weber

Front Matter Page European Department Contents I. Introduction II. Basic model A. The household and the MIU specification of money demand B. The money demand and the natural interest rate C. Linearized model III. Money demand as an indicator of the natural interest rate IV. Monetary policy A. Optimal policy coefficients and their interpretation B. Extensions of the basic model 1. Serially correlated shocks 2. Interest rate stabilization 3. Productivity shocks 4. Discount factor shocks V. A calibrated

Mr. Juan Sole
This paper studies a policy often used to defend a currency peg: raising short-term interest rates. The rationale for this policy is to stem demand for foreign reserves. Yet, this mechanism is absent from most monetary models. This paper develops a general equilibrium model with asset market frictions where this policy can be effective. The friction I emphasize is the same as in Lucas (1990): money is required for asset transactions. When the government raises domestic interest rates, agents want to increase their holdings of domestic currency in order to acquire more domestic-currency-denominated assets. Thus, agents do not run on the reserves of the central bank, and the peg survives. A key implication of the model is that an interest rate defense can always be successful, but at great costs for domestic agents. Hence the reluctance of governments to sustain this policy for long periods of time.
Mr. Abbas Mirakhor and Delano Villanueva

strengthen bank supervision while regulating interest rates Stabilize economy and maintain supervision: begin gradual interest rate liberalization Maintain economic stability and boost supervision: while enhancing supervision, temporarily regulate interest rates Maintain economic stability and supervision: can liberalize interest rates simultaneously Step 2 Liberalize interest rates Completely liberalize interest rates Liberalize interest rates Note: UM denotes unstable macroeconomy; SM denotes stable macroeconomy; IS denotes inadequate bank

International Monetary Fund

adjustments in interest rates, and contributed to Mexico’s impressive record in reducing inflation. Many Directors considered, however, that as inflation and interest rates stabilize at low levels, a short-term interest rate target would provide a greater degree of monetary control and increase transparency, thereby helping to keep inflation within a narrow target range and communicating the authorities’ monetary policy intentions more clearly. At the same time, given the importance of correct timing and careful management of the transition process, they considered that the