Are Capital Controls and Central Bank Intervention Effective?
AbstractCapital controls and intervention in the foreign exchange market are two controversial policy options that many countries have adopted in the past in order to influence the exchange rate and moderate capital flows. Colombia has a long record in the use of these policies with mixed results and often non negligible costs. The objective of this paper is to evaluate for the case of Colombia the effectiveness of capital controls and central bank intervention for depreciating the exchange rate, reducing its volatility, and moderating the exchange rate vulnerability to external shocks. The paper uses high frequency data from 1993 to 2010, and a GARCH model of the peso/US dollar exchange rate return. The main findings indicate that neither capital controls nor central bank intervention used separately were successful for depreciating the exchange rate. On the contrary, they augmented its volatility. Nonetheless, when both policies were used simultaneously, a statistical significant effect was obtained by which the interaction of capital control and intervention in the foreign exchange market were effective to produce a daily average depreciation of the exchange rate, without increasing its volatility. This result however should be taken with caution given the special economic circumstances that characterized 2008, when most of this interaction happened.
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Bibliographic InfoPaper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 007622.
Date of creation: 20 Oct 2010
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Capital controls (Tobin tax); central bank intervention; GARCH regression model of the exchange rate return; effectiveness.;
Other versions of this item:
- Hernán Rincón & Jorge Toro, . "Are Capital Controls and Central Bank Intervention Effective?," Borradores de Economia 625, Banco de la Republica de Colombia.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-06 (All new papers)
- NEP-CBA-2010-11-06 (Central Banking)
- NEP-IFN-2010-11-06 (International Finance)
- NEP-MON-2010-11-06 (Monetary Economics)
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