The Effects of Capital Controls on Exchange Rate Volatility and Output
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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.
Series:
Working Paper No. 2001/187
Subject:
Balance of payments Capital controls Capital flows Capital inflows Exchange rate adjustments Exchange rates Foreign exchange
English
Publication Date:
November 1, 2001
ISBN/ISSN:
9781451859515/1018-5941
Stock No:
WPIEA1872001
Pages:
30
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