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Capital controls and the volatility of the renminbi covered interest deviation

Author

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  • Zhitao Lin

    (College of Economics and Institute of Finance, Jinan University, Guangzhou)

  • Jinzhao Chen

    (CleRMa - Clermont Recherche Management - ESC Clermont-Ferrand - École Supérieure de Commerce (ESC) - Clermont-Ferrand - UCA - Université Clermont Auvergne)

  • Xingwang Qian

    (Economics and Finance Department, SUNY Buffalo State, Buffalo, NY)

Abstract

This paper examines how capital controls affect the volatility of the renminbi (RMB) covered interest deviation (CID). We find that capital controls amplify the volatility of RMB CID and the amplification effect becomes more prominent in more flexible RMB exchange regimes. Capital controls influence the volatility of interest rate differential (IRD) and forward premium (FP), two components of CID, differently, particularly during the U.S. Fed's QE era. In addition, using an error correction model, we show that, while capital controls magnify both the short-and longrun volatility of the CID and the IRD, they do not affect FP volatility.

Suggested Citation

  • Zhitao Lin & Jinzhao Chen & Xingwang Qian, 2021. "Capital controls and the volatility of the renminbi covered interest deviation," Post-Print halshs-03436233, HAL.
    • Handle: RePEc:hal:journl:halshs-03436233
    DOI: 10.1111/roie.12563
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-03436233
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