The Effects of Capital Controls on Exchange Rate Volatility and Output

By Christiane Nickel, Günter Schmidt, Georg Stadtmann, Michael Frenkel

November 1, 2001

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Format: Chicago

Christiane Nickel, Günter Schmidt, Georg Stadtmann, and Michael Frenkel. The Effects of Capital Controls on Exchange Rate Volatility and Output, (USA: International Monetary Fund, 2001) accessed September 20, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper extends the Dornbusch model of overshooting exchange rates to discuss both exchange rate and output effects of capital controls that involve additional costs for international asset transactions. We show that, on the one hand, such capital controls have the merit of reducing the volatility of exchange rates following a monetary shock. On the other hand, the implementation increases exchange rate volatility in the short run and induces costs for the real sector in the form of lower equilibrium output levels.

Subject: Balance of payments, Capital controls, Capital flows, Capital inflows, Exchange rate adjustments, Exchange rates, Foreign exchange

Keywords: Aggregate supply, Capital constraint, Capital control, Capital controls, Capital flows, Capital inflows, Effectiveness of the capital control, Exchange rate, Exchange rate adjustments, Exchange rate effect, Exchange rate expectation, Exchange rate volatility, Exchange rates, Expectations of the market, Global, Goods market, Interest rate, Introduction of the capital control, Nominal exchange rate, Price level, Purpose of the capital control, Quantity control, Sovereign bond, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2001/187
Stock No:

WPIEA1872001
ISBN:

9781451859515
ISSN:

1018-5941

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