A NOTE ON THE BALANCE OF PAYMENTS EFFECTS OF THE U.S. CAPITAL CONTROLS PROGRAMS: SIMULATION ESTIMATES

• Date: 01 June 1974
• DOI: http://doi.org/10.1111/j.1540-6261.1974.tb01498.x
• Author: Sung Y. Kwack
• Published date: 01 June 1974

A NOTE ON THE BALANCE OF PAYMENTS EFFECTS OF THE U.S.

CAPITAL CONTROLS PROGRAMS: SIMULATION ESTIMATES

SUNG Y. KWACK*

NONMARKET measures for controlling the international flows of capital were

enacted during the 1960's in the United States to improve the balance of

payments. The effectiveness of such capital control programs such as VFCR

(the Voluntary Foreign Credit Restraint Program) on particular types of

capital flows has been examined in empirical studies by a number of investi-

gators (Branson [1], Bryant and Hendershott [2], Miller and Whitman [8]

and Herring and Willett [4]). However, quantitative information is lacking

on the question: By how much and for how long have the capital control

programs improved the balance of payments as a whole?

The purpose of this paper is to estimate the payments impact over time of

three capital control programs-VFCR, IET (the Interest Equalization Tax)

and FDIP (the Foreign Direct Investment Program). This study is based on

the simulations of a quarterly model of the U.S. balance of payments for the

period from 1965:2 through 1970:4. The first section of the paper discusses

an analytical framework for viewing the relationship between capital control

programs and the balance of payments. The second section estimates the

effects on the U.S. payments position of the capital control programs. Finally,

the third section summarizes

the finding of this paper.

I. ANALYTICAL

FRAMEWORK

Assuming no trade effects, control programs aimed at reducing capital

investments abroad, if successful, are expected to decrease foreign investment

income in both current and future periods. Given this relationship, similarities

seem to emerge between discussions of the effect of capital control programs

on the balance of payments and examinations of the relationship between the

net flow of funds and the level of foreign investment. The analytical frame-

work which follows is essentially that of Domar [3] and is a condensed

version of the econometric model used for simulation exercises.

It is assumed that rate of return on U.S. owned foreign assets is constant

and U.S. wealth grows over time at an exogenously given rate. The outflow

of U.S. capital is hypothesized to depend on the gap between desired and

actual levels of foreign assets, where the desired ratio of foreign assets to

wealth is related negatively to the capital control programs, ignoring other

determinants, such as rates of return. By assumption we have for time tt

* The author is an economist at the Board of Governors of the Federal Reserve System. This

paper was written while working at the U.S. Treasury Department. The views expressed in this paper

are his and do not necessarily reflect those of the U.S. Treasury Department. The author. is

indebted to Thomas Willett, Hang-Sheng Cheng, Nicholas P. Sargen and referees for helpful com-

ments. He also thanks David Coe and Lane McVey for assistance.

1. Originally an attempt was made to express (1) and (3) in a first-order and second-order

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