Are Capital Controls and Central Bank Intervention Effective?
Capital controls and intervention in the foreign exchange market are two controversial policy options that many countries have adopted in the past in order to influence the exchange rate and moderate capital flows. Colombia has a long record in the use of these policies with mixed results and often non negligible costs. The objective of this paper is to evaluate for the case of Colombia the effectiveness of capital controls and central bank intervention for depreciating the exchange rate, reducing its volatility, and moderating the exchange rate vulnerability to external shocks. The paper uses high frequency data from 1993 to 2010, and a GARCH model of the peso/US dollar exchange rate return. The main findings indicate that neither capital controls nor central bank intervention used separately were successful for depreciating the exchange rate. On the contrary, they augmented its volatility. Nonetheless, when both policies were used simultaneously, a statistical significant effect was obtained by which the interaction of capital control and intervention in the foreign exchange market were effective to produce a daily average depreciation of the exchange rate, without increasing its volatility. This result however should be taken with caution given the special economic circumstances that characterized 2008, when most of this interaction happened.
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- Juan José Echavarría & Diego Vásquez & Mauricio Villamizar, 2009.
"Impacto de las Intervenciones Cambiarias sobre el Nivel y la Volatilidad de la Tasa de Cambio en Colombia,"
BORRADORES DE ECONOMIA
005509, BANCO DE LA REPÚBLICA.
- Juan José Echavarría & Diego Vásquez & Mauricio Villamizar, 2010. "Impacto de las intervenciones cambiarias sobre el nivel y la volatilidad de la tasa de cambio en Colombia," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.
- Juan José Echavarría & Diego Vásquez & Mauricio Villamizar, . "Impacto de las Intervenciones Cambiarias sobre el Nivel y la Volatilidad de la Tasa de Cambio en Colombia," Borradores de Economia 561, Banco de la Republica de Colombia.
- Martha Misas A & Juan José Echavarría S & Enrique López E, 2010.
"Intervenciones cambiarias y política monetaria en Colombia. Un análisis de var estructural,"
008293, UNIVERSIDAD JAVERIANA - BOGOTÁ.
- Juan José Echavarría & Enrique López E. & Martha Misas A., 2009. "Intervenciones cambiarias y política monetaria en Colombia. Un análisis de VAR estructural," BORRADORES DE ECONOMIA 006127, BANCO DE LA REPÚBLICA.
- Juan José Echavarría S. & Enrique López E. & Martha Misas A., . "Intervenciones cambiarias y política monetaria en Colombia. Un análisis de VAR estructural," Borradores de Economia 580, Banco de la Republica de Colombia.
- Cardenas, Mauricio & Barrera, Felipe, 1997. "On the effectiveness of capital controls: The experience of Colombia during the 1990s," Journal of Development Economics, Elsevier, vol. 54(1), pages 27-57, October.
- Cordella, Tito, 2003.
"Can short-term capital controls promote capital inflows?,"
Journal of International Money and Finance,
Elsevier, vol. 22(5), pages 737-745, October.
- Cordella, Tito, 1998. "Can Short-Term Capital Controls Promote Capital Inflows," CEPR Discussion Papers 2011, C.E.P.R. Discussion Papers.
- Tito Cordella, 1998. "Can Short-Term Capital Controls Promote Capital Inflows?," IMF Working Papers 98/131, International Monetary Fund.
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