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The Federal Reserve, Emerging Markets, and Capital Controls: A High Frequency Empirical Investigation

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  • Sebastian Edwards

Abstract

In this paper I use weekly data from seven emerging nations – four in Latin America and three in Asia – to investigate the extent to which changes in Fed policy interest rates have been transmitted into domestic short term interest rates during the 2000s. The results suggest that there is indeed an interest rates “pass through” from the Fed to emerging markets. However, the extent of transmission of interest rate shocks is different – in terms of impact, steady state effect, and dynamics – in Latin America and Asia. The results also indicate that capital controls are not an effective tool for isolating emerging countries from global interest rate disturbances. Changes in the slope of the U.S. yield curve, including changes generated by a “twist” policy, affect domestic interest rates in emerging countries. I also provide a detailed case study for Chile.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18557.

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Date of creation: Nov 2012
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Handle: RePEc:nbr:nberwo:18557

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  1. Dennis P. Quinn, 2003. "Capital account liberalization and financial globalization, 1890-1999: a synoptic view," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 8(3), pages 189-204.
  2. Alejandro Justiniano & Bruce Preston, 2009. "Can structural small open economy models account for the influence of foreign disturbances?," Working Paper Series, Federal Reserve Bank of Chicago WP-09-19, Federal Reserve Bank of Chicago.
  3. Aizenman, Joshua & Chinn, Menzie D. & Ito, Hiro, 2011. "Surfing the waves of globalization: Asia and financial globalization in the context of the trilemma," Journal of the Japanese and International Economies, Elsevier, vol. 25(3), pages 290-320, September.
  4. Sebastian Edwards, 2007. "Capital Controls, Capital Flow Contractions, and Macroeconomic Vulnerability," NBER Working Papers 12852, National Bureau of Economic Research, Inc.
  5. Jay C. Shambaugh, 2004. "The Effect of Fixed Exchange Rates on Monetary Policy," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 119(1), pages 300-351, February.
  6. Edison, Hali J. & Warnock, Francis E., 2003. "A simple measure of the intensity of capital controls," Journal of Empirical Finance, Elsevier, Elsevier, vol. 10(1-2), pages 81-103, February.
  7. De Gregorio, Jose & Edwards, Sebastian & Valdes, Rodrigo O., 2000. "Controls on capital inflows: do they work?," Journal of Development Economics, Elsevier, Elsevier, vol. 63(1), pages 59-83, October.
  8. Jacques Miniane, 2004. "A New Set of Measures on Capital Account Restrictions," IMF Staff Papers, Palgrave Macmillan, vol. 51(2), pages 4.
  9. Frankel, Jeffrey & Schmukler, Sergio L. & Serven, Luis, 2004. "Global transmission of interest rates: monetary independence and currency regime," Journal of International Money and Finance, Elsevier, Elsevier, vol. 23(5), pages 701-733, September.
  10. Bianca De Paoli, 2004. "Monetary policy and welfare in a small open economy," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 19950, London School of Economics and Political Science, LSE Library.
  11. Menzie D. Chinn & Hiro Ito, 2002. "Capital Account Liberalization, Institutions and Financial Development: Cross Country Evidence," NBER Working Papers 8967, National Bureau of Economic Research, Inc.
  12. Sebastian Edwards & Mohsin S. Khan, 1985. "Interest Rate Determination in Developing Countries: A Conceptual Framework," NBER Working Papers 1531, National Bureau of Economic Research, Inc.
  13. Binici, Mahir & Hutchison, Michael & Schindler, Martin, 2010. "Controlling capital? Legal restrictions and the asset composition of international financial flows," Journal of International Money and Finance, Elsevier, Elsevier, vol. 29(4), pages 666-684, June.
  14. Jacques Miniane & John H. Rogers, 2003. "Capital controls and the international transmission of U.S. money shocks," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 778, Board of Governors of the Federal Reserve System (U.S.).
  15. Martin Uribe & Vivian Z. Yue, 2003. "Country Spreads and Emerging Countries: Who Drives Whom?," NBER Working Papers 10018, National Bureau of Economic Research, Inc.
  16. Edwards, Sebastian & Rigobon, Roberto, 2009. "Capital controls on inflows, exchange rate volatility and external vulnerability," Journal of International Economics, Elsevier, Elsevier, vol. 78(2), pages 256-267, July.
  17. Sebastian Edwards, 1999. "How Effective Are Capital Controls?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 13(4), pages 65-84, Fall.
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Cited by:
  1. Yothin Jinjarak & Ilan Noy & Huanhuan Zheng, 2013. "Capital Controls in Brazil – Stemming a Tide with a Signal?," NBER Working Papers 19205, National Bureau of Economic Research, Inc.
  2. Jinjarak, Yothin & Noy, Ilan & Zheng, Huanhuan, 2013. "What Lessons Can Asia Draw from Capital Controls in Brazil during 2008–2012?," ADBI Working Papers, Asian Development Bank Institute 423, Asian Development Bank Institute.
  3. Andreas Hoffmann & Axel Loeffer, 2014. "Low Interest Rate Policy and the Use of Reserve Requirements in Emerging Markets," ICER Working Papers, ICER - International Centre for Economic Research 01-2014, ICER - International Centre for Economic Research.
  4. Gozgor, Giray, 2014. "Determinants of domestic credit levels in emerging markets: The role of external factors," Emerging Markets Review, Elsevier, Elsevier, vol. 18(C), pages 1-18.

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