Are Capital Controls in the Foreign Exchange Market Effective?

39 Pages Posted: 11 Jun 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 1, 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, Forward premia, Interest differentials, Monetary freedom

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 1, 2008). CEPR Discussion Paper No. DP6727, Available at SSRN: https://ssrn.com/abstract=1141633

Stefan Straetmans (Contact Author)

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

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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