Capital Inflows, Exchange Rate Management, and Capital Controls

This chapter provides concrete policy advice for dealing with capital inflows. In sum, once the monetary authorities have allowed the exchange rate to appreciate to a level that is not undervalued from a multilaterally consistent medium-term perspective, they may want to start intervening in the foreign exchange (FX) market to prevent further appreciation, sterilizing the intervention if there are inflationary pressures. If the economy shows signs of overheating, monetary and fiscal tightening might be necessary, together with macroprudential measures to contain excessive credit growth. To the extent these policies prove insufficient, the authorities need to consider bolstering them by imposing or tightening capital controls. At the same time, national authorities must be mindful of growing balance-sheet mismatches in the economy and should avail themselves of both prudential measures and capital controls to shift the composition of inflows toward less risky forms of liabilities.

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Real exchange of rate of balance and misalignments: Lesson from the model VAR-ECM in the case of Tunisia

Panoeconomicus ◽

10.2298/pan0804439c ◽

2008 ◽

Vol 55 (4) ◽

pp. 439-464

Author(s):

Marrakchi Charfi

Keyword(s):

Exchange Rate ◽

Real Exchange Rate ◽

Open Economy ◽

Capital Controls ◽

Capital Inflows ◽

Real Effective Exchange Rate ◽

The Us ◽

Effective Exchange ◽

In The Beginning ◽

Effective Exchange Rate

Tunisia has experienced a performance when pursuing a constant real exchange rate rule. The limitations of this rule are beginning to emerge in the context of a more open economy, which desire to relax capital controls. This paper estimates the equilibrium real exchange rate of the dinar vis ? vis the euro and the $US from 1983 to 2000, using quarterly data, based on the following fundamental variables: terms of trade, net capital inflows and the differential of productivity. Results show that Tunisian dinar was overvalued before the 1986 devaluation, becomes close to its equilibrium value over the 90s'. In the beginning of this century (2000), authorities permit a larger fluctuation of the real effective exchange rate. .

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Attenuating international financial shocks: the role of capital controls

International Journal of Emerging Markets ◽

10.1108/ijoem-12-2020-1540 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Chokri Zehri

Keyword(s):

Exchange Rate ◽

Empirical Work ◽

Capital Controls ◽

Capital Inflows ◽

Monetary Shocks ◽

Financial Shocks ◽

Empirical Examination ◽

Content Type ◽

Exchange Rate Shocks

PurposeBy reinforcing monetary policy independence, reducing international financing pressures and avoiding high-risk takings, capital controls strengthen the stability of the financial system and then reduce the volatility of capital inflows. The objective of this study was to conduct an empirical examination of this hypothesis. This topic has received strong support in the theoretical literature; however, empirical work has been quite limited, with few empirical studies that provide direct empirical support to this hypothesis.Design/methodology/approachThis study analyzed quarterly data of 32 emerging economies over the period between 2000 and 2015 and proposes two methods to identify capital control actions. Using panel analysis, Autoregressive Distributed Lag and local projections approaches.FindingsThis study found that tighter capital controls may diminish monetary and exchange rate shocks and reduce capital inflows volatility. Furthermore, capital controls respond counter-cyclically to monetary shocks. Under capital controls, countries with floating exchange rate regimes have more potential to buffer monetary shocks. We also found that capital controls on inflows are more effective for reducing the volatility of capital inflows compared to capital controls on outflows.Originality/valueThis study contributes to the question of the effectiveness of capital controls in attenuating the effects of international shocks and reducing the volatility of capital flows. Previous studies have mostly focused on the role of macroprudential regulation; however, there is a lack of systematic effects of capital controls on monetary and exchange rate policies. To our knowledge, this is the first preliminary study to suggest that capital controls may buffer monetary and exchange rate shocks and reduce the volatility of capital inflows. This study investigates the novel notion that capital controls allow for a notable counter-cyclical response of monetary and exchange rate policies to international financial shocks.

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Dutch Disease-cum-financialization Booms and External Balance Cycles in Developing Countries

Brazilian Journal of Political Economy ◽

10.1590/0101-31572017v37n03a01 ◽

2017 ◽

Vol 37 (3) ◽

pp. 459-477 ◽

Cited By ~ 5

Author(s):

ALBERTO BOTTA

Keyword(s):

Developing Countries ◽

Monetary Policy ◽

Exchange Rate ◽

Exchange Rate Volatility ◽

Capital Controls ◽

Dutch Disease ◽

Capital Inflows ◽

Development Pattern ◽

Macroeconomic Uncertainty ◽

Long Run

ABSTRACT We formally investigate the medium-to-long-run dynamics emerging out of a Dutch disease-cum-financialization phenomenon. We take inspiration from the most recent Colombian development pattern. The “pure” Dutch disease first causes deindustrialization by permanently appreciating the economy’s exchange rate in the long run. Financialization, i.e., booming capital inflows taking place in a climate of natural resource-led financial overoptimism, causes medium-run exchange rate volatility and macroeconomic instability. This jeopardizes manufacturing development even further by raising macroeconomic uncertainty. We advise the adoption of capital controls and a developmentalist monetary policy to tackle these two distinct but often intertwined phenomena.

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Cheaper Currencies and Long‐Term Growth: The Effect of Exchange Rate Management and Capital Controls

World Economy ◽

10.1111/twec.13081 ◽

2020 ◽

Author(s):

Phornchanok Cumperayot ◽

Roy Kouwenberg

Keyword(s):

Exchange Rate ◽

Capital Controls ◽

Exchange Rate Management

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Effectiveness of capital controls in dampening international shocks

Review of Keynesian Economics ◽

10.4337/roke.2021.04.05 ◽

2021 ◽

Vol 9 (4) ◽

pp. 521-551

Author(s):

Chokri Zehri

Keyword(s):

Exchange Rate ◽

Capital Flows ◽

Capital Controls ◽

Capital Inflows ◽

Monetary Shocks ◽

Distributed Lag ◽

Autoregressive Distributed Lag ◽

Floating Exchange Rate ◽

Exchange Rate Shocks ◽

International Shocks

This study is a contribution to the ongoing debate on whether capital controls are effective in buffering international shocks and reducing capital flows volatility. The author demonstrates that capital controls can considerably mitigate the effects of monetary and exchange rate shocks and reduce the volatility of capital inflows to emerging markets. This study analyses quarterly data of 28 emerging economies over the period between 2000 and 2015 and proposes two methods to identify capital controls actions. Using panel analysis, autoregressive distributed lag, and local projections approaches, this study finds that tighter capital controls may diminish monetary and exchange rate shocks and reduce capital inflows volatility. Furthermore, capital controls respond anti-cyclically to monetary shocks. Under capital controls, countries with floating exchange rate regimes have more potential to buffer monetary shocks. The author also finds that capital controls on inflows are more effective for reducing the volatility of capital flows compared to capital controls on outflows.

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