No Capital Mobility between Union and Rest of the World

As a rule, in this book, we assume perfect capital mobility between the union and the rest of the world. As an exception, in this chapter, we assume no capital mobility between the union and the rest of the world. The regime of capital immobility will occur if foreign debt of the union exceeds a critical level. Alternatively, this regime will occur if capital controls are introduced to ward off speculative attacks. The investigation will be conducted within the following setting. The monetary union is a small open economy. Given that there is no capital mobility, there will be no link between the union interest rate r and the foreign interest rates. The exchange rate between the union and the rest of the world is flexible. For that reason, the current account of the union is always balanced.