Capital controls, exchange rate volatility and risk premium
Capital controls lower the variability of the exchange rate and reduce the risk premium as well as the domestic interest rate. On the other hand, capital controls reduce the number of noise traders and, therefore, the risk-bearing capacity of the market, leading to higher interest rates and a lower growth potential of the economy. The identification of these two effects which work in opposite directions are the result of a study on the effect of capital controls on the exchange rate, the domestic interest rate, and the microstructure of the foreign exchange market in a small open economy.
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- J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, .
"Noise Trader Risk in Financial Markets,"
J. Bradford De Long's Working Papers
_124, University of California at Berkeley, Economics Department.
- Thomas Palley, 1999. "Speculation and Tobin taxes: Why sand in the wheels can increase economic efficiency," Journal of Economics, Springer, vol. 69(2), pages 113-126, June.
- Raffer, Kunibert, 1998. "The tobin tax: Reviving a discussion," World Development, Elsevier, vol. 26(3), pages 529-538, March.
- Osler, C. L., 1998. "Short-term speculators and the puzzling behaviour of exchange rates," Journal of International Economics, Elsevier, vol. 45(1), pages 37-57, June.
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