CAPITAL-ACCOUNT LIBERALIZATION AS A SIGNAL

We present a model in which a government's current capital-control pol icy signals future policies. Controls on capital outflows evolve in re sponse to news on technology, conditional on government attitudes towa rd taxation of capital. When there is uncertainty over government type s, a policy of liberal capital outflows sends a favorable signal that may trigger a capital inflow. This prediction is consistent with the e xperience of several countries that have liberalized their capital acc ounts.