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Capital Controls and Foreign Exchange Policy

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  • Marcel Fratzscher

Abstract

The empirical analysis in the paper suggests that an FX policy objective and concerns about an overheating of the domestic economy have been the two main motives for the (re-)introduction and persistence of capital controls over the past decade. Capital controls are strongly associated with countries having significantly undervalued currencies. Capital controls also appear to be less motivated by worries about financial market volatility or fickle capital flows per se, but rather by concerns about capital inflows triggering an overheating of the economy – in the form of high credit growth, rising inflation and increased output volatility. Moreover, countries with a high level of capital controls, and those actively implementing controls, tend to be those that have fixed exchange rate regimes, a non-IT monetary policy framework and shallow financial markets. This evidence is consistent with capital controls being used, at least in part, to compensate for the absence of autonomous macroeconomic and prudential policies and effective adjustment mechanisms for dealing with capital flows.

Suggested Citation

  • Marcel Fratzscher, 2011. "Capital Controls and Foreign Exchange Policy," Working Papers Central Bank of Chile 652, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:652
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Forbes, Kristin & Fratzscher, Marcel & Straub, Roland, 2015. "Capital-flow management measures: What are they good for?," Journal of International Economics, Elsevier, vol. 96(S1), pages 76-97.
    2. repec:chb:bcchec:v:18:y:2015:i:1:p:50-66 is not listed on IDEAS
    3. Escudé, Guillermo J., 2014. "The possible trinity: Optimal interest rate, exchange rate, and taxes on capital flows in a DSGE model for a small open economy," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 8, pages 1-58.
    4. Blaise Gadanecz & Ken Miyajima & Jörg Urban, 2014. "How might EME central banks respond to the influence of global monetary factors?," BIS Papers chapters,in: Bank for International Settlements (ed.), The transmission of unconventional monetary policy to the emerging markets, volume 78, pages 45-69 Bank for International Settlements.
    5. Taeyoon Sung & Jong-Hee Kim, 2016. "Unconventional Monetary Policy, Global Liquidity Circulation, and Inflation Divergence around the World," The Developing Economies, Institute of Developing Economies, vol. 54(1), pages 6-26, March.
    6. Giordani, Paolo E. & Ruta, Michele & Weisfeld, Hans & Zhu, Ling, 2017. "Capital flow deflection," Journal of International Economics, Elsevier, vol. 105(C), pages 102-118.
    7. Beckmann, Joscha & Ademmer, Esther & Belke, Ansgar & Schweickert, Rainer, 2017. "The political economy of the impossible trinity," European Journal of Political Economy, Elsevier, vol. 47(C), pages 103-123.
    8. Phornchanok Cumperayot & Roy Kouwenberg, 2016. "Currency Wars: Who Gains from the Battle?," PIER Discussion Papers 18., Puey Ungphakorn Institute for Economic Research, revised Feb 2016.

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    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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