Macroeconomic Interdependence Under Capital Controls : A Two-Country Model of Dual Exchange Rates

This paper studies the transmission of monetary and fiscal disturbances under capital controls that are implemented via dual exchange rates. The results are contrasted with those under fixed exchange rates and perfect capital mobility. While under perfect capital mobility, permanent policy disturbances have no real effects abroad and the adjustment is instantaneous, under dual exchange rates, these disturbances are transmitted abroad and adjustment is gradual. The co-movement of both domestic and foreign consumption and domestic and foreign real interest rates is negative during the transition period, independently of the type of disturbance