A double-edged sword. High interest rates in capital-control regimes
This paper derives the relationship between central bank interest rates and exchange rates under a capital control regime. Higher interest rate may strengthen the currency by reducing consumption and imports and by inducing foreign owners of local currency assets not to sell local currency off shore. There is also an effect that goes in the opposite direction: Higher interest rates increase the flow of interest income to foreigners through the current account which makes the exchange rate fall. The historical financial crisis now under way in Iceland provides excellent testing grounds for the analysis. Overall, the experience does not suggest that cutting interest rates moderately from a very high level is likely to make a currency depreciate in a capital control regime but highlights the importance of effective enforcing of the controls.
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"The Aftermath of Financial Crises,"
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"Las secuelas de las crisis financieras
[The aftermath of financial crisis]," MPRA Paper 13695, University Library of Munich, Germany.
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- Akira Ariyoshi & Andrei A Kirilenko & Inci Ã–tker & Bernard J Laurens & Jorge I Canales Kriljenko & Karl F Habermeier, 2000. "Capital Controls; Country Experiences with Their Use and Liberalization," IMF Occasional Papers 190, International Monetary Fund. Full references (including those not matched with items on IDEAS)
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- Reinhart, Carmen & Rogoff, Kenneth, 2008. "Las secuelas de las crisis financieras