The Stabilization of an Open Economy with Capital Controls: An Analysis Using Malaysian Data

The purpose of this paper is to analyze the effectiveness of capital controls and fixed exchange rates in improving economic welfare. We apply Malaysian data to our theoretical model and derive the following results for the period of our estimation. High exchange rate volatility negatively affects Malaysian net exports and real GDP. By stabilizing the exchange rate and recovering monetary policy autonomy, capital controls and fixed exchange rates can lead to lower values of loss functions. This beneficial effect is stronger, the more open the Malaysian economy. Copyright (c) 2004 The Earth Institute at Columbia University and the Massachusetts.