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Facing Volatile Capital Flows: The Role of Exchange Rate Flexibility and Foreign Assets


  • Rodrigo Cifuentes
  • Alejandro Jara


In this paper we study the role played by capital controls (CC), the flexibility of the exchange rate regime (FERR) and the stock of assets held abroad (AA) in reducing the volatility of capital flows. First, following Forbes and Warnok (2012), we study the impact of CC, FERR and AA on the probability of stops and surges of gross capital inflows. We find that FERR reduces the probability of a stop, but CC and AA have no impact. Second, we look at their role in facilitating an offsetting event on outflows (a retrenchment or a flight) to an event on inflows (a stop or a surge, respectively). We find that both FEER and AA increase significantly the probability of a retrenchment occurring when a stop has taken place; while lower CC increases the probability of a flight in the event of a surge. Finally, we look at the extent at which funds lost (gained) in a stop (surge) are compensated by funds gained (lost) in a retrenchment (flight). We find that FERR remain the most significant policy tool behind the compensation of stops, as well as CC is for the compensation of surges.

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  • Rodrigo Cifuentes & Alejandro Jara, 2014. "Facing Volatile Capital Flows: The Role of Exchange Rate Flexibility and Foreign Assets," Working Papers Central Bank of Chile 742, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:742

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    References listed on IDEAS

    1. Adler, Gustavo & Djigbenou, Marie-Louise & Sosa, Sebastian, 2016. "Global financial shocks and foreign asset repatriation: Do local investors play a stabilizing role?," Journal of International Money and Finance, Elsevier, vol. 60(C), pages 8-28.
    2. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters,in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
    3. Bank for International Settlements, 2008. "Monetary and financial stability implications of capital flows in Latin America and the Caribbean," BIS Papers, Bank for International Settlements, number 43.
    4. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 1-48.
    5. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
    6. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
    7. Jonathan David Ostry & Atish R. Ghosh & Karl F Habermeier & Marcos Chamon & Mahvash S Qureshi & Dennis B. S. Reinhardt, 2010. "Capital Inflows; The Role of Controls," IMF Staff Position Notes 2010/04, International Monetary Fund.
    8. Dennis P. Quinn, 2003. "Capital account liberalization and financial globalization, 1890-1999: a synoptic view," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(3), pages 189-204.
    9. repec:hrv:faseco:34721963 is not listed on IDEAS
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    Cited by:

    1. Eduardo Levy Yeyati & Jimena Zúñiga, 2015. "Varieties of capital flows: What do we know," Business School Working Papers 2015-01, Universidad Torcuato Di Tella.
    2. Gabriela Contreras & Francisco Pinto, 2014. "Vulnerability to Changes in External Financing Due to Global Factors," Working Papers Central Bank of Chile 734, Central Bank of Chile.

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