Are capital controls in the foreign exchange market effective?

S.T.M. Straetmans, R.J. Versteeg, C.C.P. Wolff*

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

One of the reasons for governments to employ capital controls is to obtain some degree of monetary independence. In this paper we test whether capital controls can reduce the link between exchange rates fluctuations and cross border interest differentials. Recent capital control proxies are used in order to determine the date of capital account liberalization for a panel of Western European and emerging countries. Results show that capital controls have a very limited effect on observed deviations from interest parities, even when accounting for the political risk associated with capital controls. (C) 2013 Elsevier Ltd. All rights reserved.
Original languageEnglish
Pages (from-to)36-53
Number of pages18
JournalJournal of International Money and Finance
Volume35
DOIs
Publication statusPublished - Jun 2013

Keywords

  • Capital controls
  • Exchange rates
  • Interest differentials
  • Forward premia
  • Monetary freedom
  • Political risk
  • INTEREST-RATE PARITY
  • COVERED INTEREST PARITY
  • RATES
  • EXPECTATIONS
  • INTEGRATION
  • ARBITRAGE
  • PREMIA
  • DOLLAR
  • MONEY
  • RISK

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