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Are Capital Controls and Central Bank Intervention Effective?

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  • Hernán Rincón

    ()

  • Jorge Toro

    ()

Abstract

Capital 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 Info

Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 007622.

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Length: 42
Date of creation: 20 Oct 2010
Date of revision:
Handle: RePEc:col:000094:007622

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Keywords: Capital controls (Tobin tax); central bank intervention; GARCH regression model of the exchange rate return; effectiveness.;

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References

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  1. Juan José Echavarría & Diego Vásquez & Mauricio Villamizar, 2009. "Impacto de las Intervenciones Cambiarias sobre el Nivel y la Volatilidad de la Tasa de Cambio en Colombia," BORRADORES DE ECONOMIA 005509, BANCO DE LA REPÚBLICA.
  2. Cardenas, Mauricio & Barrera, Felipe, 1997. "On the effectiveness of capital controls: The experience of Colombia during the 1990s," Journal of Development Economics, Elsevier, vol. 54(1), pages 27-57, October.
  3. Juan José Echavarría & Enrique López E. & Martha Misas A., 2009. "Intervenciones cambiarias y política monetaria en Colombia. Un análisis de VAR estructural," BORRADORES DE ECONOMIA 006127, BANCO DE LA REPÚBLICA.
  4. Tito Cordella, 1998. "Can Short-Term Capital Controls Promote Capital Inflows?," IMF Working Papers 98/131, International Monetary Fund.
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Cited by:
  1. Carmen Broto, 2012. "The effectiveness of forex interventions in four Latin American countries," Banco de Espa�a Working Papers 1226, Banco de Espa�a.
  2. Nicolas E. Magud & Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "Capital Controls: Myth and Reality - A Portfolio Balance Approach," NBER Working Papers 16805, National Bureau of Economic Research, Inc.
  3. Lambert, F. & Ramos-Tallada, J. & Rebillard, C., 2011. "Capital controls and spillover effects: evidence from Latin-American countries," Working papers 357, Banque de France.
  4. Hernando Vargas H, 2011. "Monetary policy and the exchange rate in Colombia," BIS Papers chapters, in: Bank for International Settlements (ed.), Capital flows, commodity price movements and foreign exchange intervention, volume 57, pages 129-153 Bank for International Settlements.
  5. International Monetary Fund, 2011. "Foreign Exchange Intervention," IMF Working Papers 11/165, International Monetary Fund.

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