Are Capital Controls in the Foreign Exchange Market Effective?

38 Pages Posted: 24 Feb 2008

See all articles by Stefan Straetmans

Stefan Straetmans

Maastricht University ; University of Antwerp - Faculty of Applied Economics

Roald J. Versteeg

University of London - Economics, Mathematics and Statistics

Christian C. P. Wolff

University of Luxembourg - Luxembourg School of Finance; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2008

Abstract

One of the reasons for governments to use capital controls is to obtain some degree of monetary independence. This paper investigates the link between capital controls and interest differentials/ forward premia. This to test whether they can indeed give governments the power to drive exchange rates away from parity conditions. Two capital control variables are constructed in addition to the standard IMF capital control dummy. These variables are used to determine the date of capital account liberalization in a panel of Western European as well as emerging countries. Results show that capital controls do not give governments extra monetary freedom. There is even some evidence that capital controls decrease the level of monetary freedom governments enjoy for a number of countries.

Keywords: Capital controls; Exchange Rates; Interest differentials; Forward Premia

JEL Classification: E42, F21, F31, G15

Suggested Citation

Straetmans, Stefan and Versteeg, Roald J. and Wolff, Christian C. P., Are Capital Controls in the Foreign Exchange Market Effective? (February 2008). Available at SSRN: https://ssrn.com/abstract=1096552 or http://dx.doi.org/10.2139/ssrn.1096552

Stefan Straetmans

Maastricht University ( email )

Tongersestraat 53
Maastricht, 6200 MD
Netherlands

HOME PAGE: http://www.stefanstraetmans.com

University of Antwerp - Faculty of Applied Economics ( email )

Prinsstraat 13
Antwerp, B-2000
Belgium

Roald J. Versteeg

University of London - Economics, Mathematics and Statistics ( email )

Malet Street
London, WC1E 7HX
United Kingdom

Christian C. P. Wolff (Contact Author)

University of Luxembourg - Luxembourg School of Finance ( email )

4, rue Albert Borschette
Luxembourg, 1246
Luxembourg

HOME PAGE: http://www.lsf.lu

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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