The Effect of Capital Controls on Exchange Rate Risk
26 Pages Posted: 12 Feb 2009
Date Written: February 12, 2009
Many countries try to smooth their exchange rate movements by means of capital controls or otherwise. By the use of statistical extreme value analysis, we investigate if capital controls succeed in lowering the exchange rate volatility. We define forex volatility as the risk of extreme depreciations. For a sample of developed and emerging markets we find that capital controls are not effective in reducing this extreme depreciation risk. On the contrary, extreme depreciation risk is almost twice as high compared to an exchange rate regime without capital controls.
Keywords: Capital controls, Exchange Rates, Extreme Value Theory, Exchange rate risk, Extreme quantiles
JEL Classification: F21, F31
Suggested Citation: Suggested Citation