We use high frequency data and a new econometric methodology to evaluate the effectiveness of controls on capital inflows. We focus on Chile's experience during the 1990s and investigate whether controls on capital inflows reduced Chile's vulnerability to external shocks. We recognize that changes in the controls will affect the way in which different macro variables relate to each other. We take this problem seriously, and we develop a methodology to deal explicitly with it. The main findings may be summarized as follows: (a) A tightening of capital controls on inflows depreciates the exchange rate. (b) We find that the "vulnerability" of the nominal exchange rate to external factors decreases with a tightening of the capital controls. And (c), we find that a tightening of capital controls increases the unconditional volatility of the exchange rate, but makes this volatility less sensitive to external shocks.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
11434.
Length: Date of creation: Jun 2005 Date of revision: Handle: RePEc:nbr:nberwo:11434
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Find related papers by JEL classification: F30 - International Economics - - International Finance - - - General F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
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Bertola, Giuseppe & Caballero, Ricardo J, 1992.
"Target Zones and Realignments,"
American Economic Review,
American Economic Association, vol. 82(3), pages 520-36, June.
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Nicolas Magud & Carmen M. Reinhart, 2007.
"Capital Controls: An Evaluation,"
NBER Chapters,
in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 645-674
National Bureau of Economic Research, Inc.
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