In the light of the recent financial crisis, we investigate the effects generated by limited asset market participation on optimal monetary and fiscal policy, where monetary and fiscal authority are independent and play strategically. We find that limited asset market participation strongly...

It is often argued that deregulation of international transactions and its effects on the globalization of financial markets is behind the decline in the attractiveness of fixed exchange rate regimes. We argue that, instead, much of the recently observed decrease in the level of capital controls...

This paper describes the relationship between central bank interest rates and exchange rates under a capital control regime. Higher interest rates may strengthen the currency by inducing owners of local currency assets not to sell local currency off shore. There is also an effect that goes in...