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Exchange Rate Regimes, Capital Controls and the Pattern of Speculative Capital Flows

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  • Mouhamadou Sy

    (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales [EHESS] - Ecole des Ponts ParisTech - Ecole normale supérieure de Paris - ENS Paris - Institut national de la recherche agronomique (INRA), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, Département Economie - Finances - Centre d'analyse stratégique)

Abstract

This paper proposes theoretical and empirical analysis of the effect of capital controls and alternative exchange rate regimes on the patterns of speculative capital. I argue that the exchange rate regime and its interaction with the monetary regime can explain the patterns of speculative capital around the world. I show that speculative capitals are more likely to flow into countries in which there is a contradiction between the monetary and the exchange regimes, e.g. more likely in countries with managed exchange rates. I model exchange-rate as a jump process in a stochastic dynamic portfolio optimization. Through this approach, the influence of the frequency and the size of "jumps" in the exchange rate on the allocation of speculative capital can be determined. It will also allow inflows to be endogenous. By linking the jumps to the frequency of exchange rate movements, this paper determines the effectiveness of different exchange rate regimes in fending off "hot money" for a given monetary regime. On the empirical side, I use a newly constructed data set to verify the theoretical predictions of the determinants and the patterns of speculative capital. Capital controls do not affect speculative capital.

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Bibliographic Info

Paper provided by HAL in its series PSE Working Papers with number halshs-00684591.

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Date of creation: Apr 2012
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Handle: RePEc:hal:psewpa:halshs-00684591

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Related research

Keywords: Short-term Capital Flows ; Exchange Rate Regimes ; Financial Openness;

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References

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  1. Penati, Alessandro & Pennacchi, George, 1989. "Optimal portfolio choice and the collapse of a fixed-exchange rate regime," Journal of International Economics, Elsevier, vol. 27(1-2), pages 1-24, August.
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  16. Campbell R. Harvey & Akhtar Siddique, 2000. "Conditional Skewness in Asset Pricing Tests," Journal of Finance, American Finance Association, vol. 55(3), pages 1263-1295, 06.
  17. Laura Alfaro & Sebnem Kalemli-Ozcan & Vadym Volosovych, 2007. "Capital Flows in a Globalized World: The Role of Policies and Institutions," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 19-72 National Bureau of Economic Research, Inc.
  18. Daniel Gros, 1987. "The Effectiveness of Capital Controls: Implications for Monetary Autonomy in the Presence of Incomplete Market Separation," IMF Staff Papers, Palgrave Macmillan, vol. 34(4), pages 621-642, December.
  19. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
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