WORKING PAPER 12-14

Capital Account Policies and the Real Exchange Rate

by Olivier Jeanne, Peterson Institute for International Economics

September 2012

This paper presents a simple model of how a small open economy can undervalue its real exchange rate using its capital account policies. The paper presents several properties of such policies, and proposes a rule of thumb to assess their welfare cost. The model is applied to an analysis of Chinese capital account policies.

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