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Capital Controls and Exchange Rate Expectations in Emerging Markets

  • Gustavo Abarca
  • Claudia Ramírez
  • José Gonzalo Rangel

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.

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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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Paper provided by Banco de México in its series Working Papers with number 2012-08.

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Date of creation: Sep 2012
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Handle: RePEc:bdm:wpaper:2012-08
Contact details of provider: Web page: http://www.banxico.org.mx
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  1. Disyatat, Piti & Galati, Gabriele, 2007. "The effectiveness of foreign exchange intervention in emerging market countries: Evidence from the Czech koruna," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 383-402, April.
  2. Reinhart, Carmen & Reinhart, Vincent, 1999. "On the use of reserve requirements in dealing with capital flow problems," MPRA Paper 13703, University Library of Munich, Germany.
  3. Nicolas E. Magud E. & Carmen M. & Kenneth S. Rogoff, 2011. "Capital Controls: Myth and Reality--A Portfolio Balance Approach," Working Paper Series WP11-7, Peterson Institute for International Economics.
  4. Sebastian Edwards, 2000. "Capital Flows, Real Exchange Rates, and Capital Controls: Some Latin American Experiences," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 197-246 National Bureau of Economic Research, Inc.
  5. Anton Korinek, 2011. "Systemic Risk-Taking: Amplification Effects, Externalities, and Regulatory Responses," NFI Working Papers 2011-WP-13, Indiana State University, Scott College of Business, Networks Financial Institute.
  6. Lewis, Karen K, 1995. "Occasional Interventions to Target Rates," American Economic Review, American Economic Association, vol. 85(4), pages 691-715, September.
  7. Jonathan David Ostry & Atish R. Ghosh & Karl Friedrich Habermeier & Marcos Chamon & Mahvash Saeed Qureshi & Dennis B. S. Reinhardt, 2010. "Capital Inflows; The Role of Controls," IMF Staff Position Notes 2010/04, International Monetary Fund.
  8. Reinhart, Carmen & Smith, R. Todd, 1998. "Too much of a good thing: The macroeconomic effects of taxing capital inflows," MPRA Paper 13234, University Library of Munich, Germany.
  9. Carlos Montoro & Ramon Moreno, 2011. "The use of reserve requirements as a policy instrument in Latin America," BIS Quarterly Review, Bank for International Settlements, March.
  10. Christopher J. Neely, 2001. "The practice of central bank intervention: looking under the hood," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-10.
  11. Christiane Nickel & Günter Schmidt & Georg Stadtmann & Michael Frenkel, 2001. "The Effects of Capital Controlson Exchange Rate Volatility and Output," IMF Working Papers 01/187, International Monetary Fund.
  12. Sebastian Edwards, 2001. "Capital Mobility and Economic Performance: Are Emerging Economies Different?," NBER Working Papers 8076, National Bureau of Economic Research, Inc.
  13. Buch, Claudia M. & Heinrich, Ralph P. & Pierdzioch, Christian, 1998. "Taxing short-term capital flows - An option for transition economies?," Kiel Discussion Papers 321, Kiel Institute for the World Economy (IfW).
  14. Robert R. Bliss & Nikolaos Panigirtzoglou, 2004. "Option-Implied Risk Aversion Estimates," Journal of Finance, American Finance Association, vol. 59(1), pages 407-446, 02.
  15. Jose M. Campa & P.H. Kevin Chang & Robert L. Reider, 1997. "Implied Exchange Rate Distributions: Evidence from OTC Option Markets," NBER Working Papers 6179, National Bureau of Economic Research, Inc.
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