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Are capital controls in the foreign exchange market effective?

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  • Straetmans, Stefan T.M.
  • Versteeg, Roald J.
  • Wolff, Christian C.P.

Abstract

One of the reasons for governments to employ capital controls is to obtain some degree of monetary independence. In this paper we test whether capital controls can reduce the link between exchange rates fluctuations and cross border interest differentials. Recent capital control proxies are used in order to determine the date of capital account liberalization for a panel of Western European and emerging countries. Results show that capital controls have a very limited effect on observed deviations from interest parities, even when accounting for the political risk associated with capital controls.

Suggested Citation

  • Straetmans, Stefan T.M. & Versteeg, Roald J. & Wolff, Christian C.P., 2013. "Are capital controls in the foreign exchange market effective?," Journal of International Money and Finance, Elsevier, vol. 35(C), pages 36-53.
  • Handle: RePEc:eee:jimfin:v:35:y:2013:i:c:p:36-53
    DOI: 10.1016/j.jimonfin.2013.01.005
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    Cited by:

    1. Bruno, Valentina & Shim, Ilhyock & Shin, Hyun Song, 2017. "Comparative assessment of macroprudential policies," Journal of Financial Stability, Elsevier, vol. 28(C), pages 183-202.
    2. Jinjarak, Yothin & Noy, Ilan & Zheng, Huanhuan, 2013. "Capital controls in Brazil – Stemming a tide with a signal?," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2938-2952.
    3. Christie Smith, 2015. "Comments on: Effectiveness of macroprudential and capital flow measures in Asia and the Pacific," BIS Papers chapters,in: Bank for International Settlements (ed.), Cross-border Financial Linkages: Challenges for Monetary Policy and Financial Stability, volume 82, pages 193-196 Bank for International Settlements.
    4. Cardarelli, Roberto & Elekdag, Selim & Kose, M. Ayhan, 2010. "Capital inflows: Macroeconomic implications and policy responses," Economic Systems, Elsevier, vol. 34(4), pages 333-356, December.
    5. Bank for International Settlements, 2015. "Cross-border financial linkages - challenges for monetary policy and financial stability," BIS Papers, Bank for International Settlements, number 82, June.

    More about this item

    Keywords

    Capital controls; Exchange rates; Interest differentials; Forward premia; Monetary freedom; Political risk;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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