Are Capital Controls in the Foreign Exchange Market Effective?

34 Pages Posted: 22 Jan 2009

See all articles by Stefan Straetmans

Stefan Straetmans

Maastricht University ; University of Antwerp - Faculty of Applied Economics

Christian C. P. Wolff

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

Roald J. Versteeg

University of London - Economics, Mathematics and Statistics

Date Written: October 18, 2008

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. The standard IMF dummy is used together with two more refined capital control proxies in order to determine the date of capital account liberalization for a panel of Western European and emerging countries. Results show that capital controls do not give governments extra monetary freedom. For a number of countries we even find a decrease in the level of monetary freedom as a result of capital controls.

Keywords: Capital controls, Exchange Rates, Interest differentials, Forward premia, Monetary Freedom

JEL Classification: E42, F21, F31, G15

Suggested Citation

Straetmans, Stefan and Wolff, Christian C. P. and Versteeg, Roald J., Are Capital Controls in the Foreign Exchange Market Effective? (October 18, 2008). Available at SSRN: https://ssrn.com/abstract=1331435 or http://dx.doi.org/10.2139/ssrn.1331435

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

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

Roald J. Versteeg

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

Malet Street
London, WC1E 7HX
United Kingdom

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