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The Federal Reserve, Emerging Markets, and Capital Controls: A High Frequency Empirical Investigation

  • Sebastian Edwards

In this paper I use weekly data from seven emerging nations - four in Latin America and three in Asia - to investigate the extent to which changes in Fed policy interest rates have been transmitted into domestic short term interest rates during the 2000s. The results suggest that there is indeed an interest rates "pass through" from the Fed to emerging markets. However, the extent of transmission of interest rate shocks is different - in terms of impact, steady state effect, and dynamics - in Latin America and Asia. The results also indicate that capital controls are not an effective tool for isolating emerging countries from global interest rate disturbances. Changes in the slope of the U.S. yield curve, including changes generated by a "twist" policy, affect domestic interest rates in emerging countries. I also provide a detailed case study for Chile.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18557.

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Date of creation: Nov 2012
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Publication status: published as The Federal Reserve, the Emerging Markets, and Capital Controls: A High-Frequency Empirical Investigation SEBASTIAN EDWARDS Article first published online: 18 DEC 2012 DOI: 10.1111/j.1538-4616.2012.00556.x © 2012 The Ohio State University Issue Journal of Money, Credit and Banking Journal of Money, Credit and Banking Volume 44, Issue Supplement s2, pages 151–184, December 2012
Handle: RePEc:nbr:nberwo:18557
Note: DEV IFM ME
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  1. Jay C. Shambaugh, 2004. "The Effect of Fixed Exchange Rates on Monetary Policy," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 300-351, February.
  2. Hali J. Edison & Francis E. Warnock, 2001. "A simple measure of the intensity of capital controls," International Finance Discussion Papers 708, Board of Governors of the Federal Reserve System (U.S.).
  3. Martin Uribe & Vivian Yue, 2004. "Country spreads and emerging countries: who drives whom?," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  4. Sebastian Edwards, 2007. "Capital Controls, Capital Flow Contractions, and Macroeconomic Vulnerability," NBER Working Papers 12852, National Bureau of Economic Research, Inc.
  5. De Gregorio, Jose & Edwards, Sebastian & Valdes, Rodrigo O., 2000. "Controls on capital inflows: do they work?," Journal of Development Economics, Elsevier, vol. 63(1), pages 59-83, October.
  6. Edwards, Sebastian & Rigobon, Roberto, 2009. "Capital controls on inflows, exchange rate volatility and external vulnerability," Journal of International Economics, Elsevier, vol. 78(2), pages 256-267, July.
  7. De Paoli, Bianca, 2009. "Monetary policy and welfare in a small open economy," Journal of International Economics, Elsevier, vol. 77(1), pages 11-22, February.
  8. Alejandro Justiniano & Bruce Preston, 2006. "Can Structural Small Open Economy Models Account for the Influence of Foreign Disturbances?," 2006 Meeting Papers 479, Society for Economic Dynamics.
  9. Jeffrey A. Frankel & Sergio L. Schmukler & Luis Serven, 2002. "Global Transmission of Interest Rates: Monetary Independence and Currency Regime," NBER Working Papers 8828, National Bureau of Economic Research, Inc.
  10. Sebastian Edwards & Mohsin S. Khan, 1985. "Interest Rate Determination in Developing Countries: A Conceptual Framework," NBER Working Papers 1531, National Bureau of Economic Research, Inc.
  11. Aizenman, Joshua & Chen, Menzie & Ito, Hiro, 2011. "Surfing the Waves of Globalization: Asia and Financial Globalization in the Context of the Trilemma," Santa Cruz Department of Economics, Working Paper Series qt3897k2ss, Department of Economics, UC Santa Cruz.
  12. Mahir Binici & Michael M. Hutchison & Martin Schindler, 2009. "Controlling Capital? Legal Restrictions and the Asset Composition of International Financial Flows," IMF Working Papers 09/208, International Monetary Fund.
  13. 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.
  14. Jacques Miniane & John H. Rogers, 2007. "Capital Controls and the International Transmission of U.S. Money Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(5), pages 1003-1035, 08.
  15. Jacques Miniane, 2004. "A New Set of Measures on Capital Account Restrictions," IMF Staff Papers, Palgrave Macmillan, vol. 51(2), pages 4.
  16. Menzie D. Chinn & Hiro Ito, 2002. "Capital Account Liberalization, Institutions and Financial Development: Cross Country Evidence," NBER Working Papers 8967, National Bureau of Economic Research, Inc.
  17. Sebastian Edwards, 1999. "How Effective are Capital Controls?," NBER Working Papers 7413, National Bureau of Economic Research, Inc.
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