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

Listed author(s):
  • 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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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 742.

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Date of creation: Dec 2014
Handle: RePEc:chb:bcchwp:742
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  1. 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.
  2. 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.
  3. Jonathan David Ostry & Atish R. Ghosh & Karl F Habermeier & Marcos d Chamon & Mahvash S Qureshi & Dennis B. S. Reinhardt, 2010. "Capital Inflows; The Role of Controls," IMF Staff Position Notes 2010/04, International Monetary Fund.
  4. 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.
  5. 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, September.
  6. 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.
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