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Capital Controls and Exchange Rate Expectations in Emerging Markets

Author

Listed:
  • Gustavo Abarca
  • Claudia Ramírez
  • José Gonzalo Rangel

Abstract

This article examines changes in the exchange rate expectations associated with capital controls and banking regulations in a group of emerging countries that implemented these measures to control the adverse effects of sudden capital flows on their currencies. The evidence suggests that for most countries the effects of this type of policies are limited. Moreover, in some cases they appear to have an opposite effect from the one intended. In particular, for some currencies our results suggest there were changes in the extremes of their exchange rate distributions, which make their tails heavier and signal that the market allocates a greater probability to extreme movements. In the same way, evidence is found that this type of measures increases the levels of currency risk premium.

Suggested Citation

  • Gustavo Abarca & Claudia Ramírez & José Gonzalo Rangel, 2012. "Capital Controls and Exchange Rate Expectations in Emerging Markets," Working Papers 2012-08, Banco de México.
  • Handle: RePEc:bdm:wpaper:2012-08
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    File URL: http://www.banxico.org.mx/dyn/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7B86F1E2C2-48AF-469A-5969-3D70574A9713%7D.pdf
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    References listed on IDEAS

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    Cited by:

    1. repec:wsi:qjfxxx:v:04:y:2014:i:01:n:s2010139214500025 is not listed on IDEAS
    2. Arif Oduncu & Yasin Akcelik & Ergun Ermisoglu, 2013. "Reserve Options Mechanism : A New Macroprudential Tool to Limit the Adverse Effects of Capital Flow Volatility on Exchange Rates," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 13(3), pages 45-60.
    3. Santiago García-Verdú & Manuel Ramos Francia, 2014. "Interventions and Expected Exchange Rates in Emerging Market Economies," Working Papers 2014-11, Banco de México.

    More about this item

    Keywords

    Capital controls; banking regulation; exchange rate expectations; emerging economies; generalized extreme value.;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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