The Mundell–Fleming model under capital controls
In this book we assume that capital moves unhindered
across borders. This describes the current situation
quite well in industrial and many other
countries. But there are still some countries,
mostly in the developing world, that do not permit
free movements of capital in and out. In
Tanzania, for example, citizens need to submit
proof of an import contract and obtain a permit if
they want to acquire foreign currency. The purchase
or sale of currency is usually not permitted
for financial investments. As a consequence the
capital account cannot really respond to interest
rate differentials. In algebraic terms k = 0 in equation
(4.5). What does that do to the FE curve? This
is best seen after solving the general FE curve,
equation (4.7), for Y to obtain