Capital Controls, Exchange Rate Volatility and External Vulnerability

Sebastián Edwards · Roberto Rigobon B C

42 citations0/0 files storedNational Bureau of Economic Research

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Global Financial Crisis and Policies Monetary Policy and Economic Impact Financial Risk and Volatility Modeling

Abstract

We use high frequency data and a new econometric methodology to evaluate the effectiveness of controls on capital inflows.We focus on Chile's experience during the 1990s and investigate whether controls on capital inflows reduced Chile's vulnerability to external shocks.We recognize that changes in the controls will affect the way in which different macro variables relate to each other.We take this problem seriously, and we develop a methodology to deal explicitly with it.The main findings may be summarized as follows: (a) A tightening of capital controls on inflows depreciates the exchange rate.(b) We find that the "vulnerability" of the nominal exchange rate to external factors decreases with a tightening of the capital controls.And (c), we find that a tightening of capital controls increases the unconditional volatility of the exchange rate, but makes this volatility less sensitive to external shocks.

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References

1993Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors 2000Capital Market Liberalization, Economic Growth, and Instability 2004Effects on Financial Globalization on Developing Countries: Some Empirical Evidence 1998The Capital Myth: The Difference between Trade in Widgets and Dollars 1998The Capital Myth: The Difference Between Trade in Widgets and Dollars 1999Do capital controls and macroeconomic policies influence the volume and composition of capital flows? Evidence from the 1990s 1999International Institutions for Reducing Global Financial Instability 2000Control on capital inflows: do they work?

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