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