Economics at your fingertips  

Effects of capital controls on foreign exchange liquidity

Carlos Cantú

Journal of International Money and Finance, 2019, vol. 93, issue C, 201-222

Abstract: This paper investigates from a theoretical and empirical perspective the effects of capital controls on cost-based measures of foreign exchange (FX) market liquidity. First, we propose a market microstructure model of the exchange rate where capital controls reduce the trades of constrained dealers. The effect is a tightening of the effective spread, which increases market liquidity. Then, we propose a new measure of capital account restrictiveness that, in contrast to other traditional measures, can account for intensive changes in capital controls policies. Using this measure in a panel of emerging market economies, we provide empirical evidence showing that capital controls can reduce the implicit cost component of FX market liquidity.

Keywords: Capital flow management policies; Foreign exchange market; Market liquidity; Effective spread; FX liquidity measures (search for similar items in EconPapers)
JEL-codes: F31 F38 G11 G15 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

DOI: 10.1016/j.jimonfin.2019.01.006

Access Statistics for this article

Journal of International Money and Finance is currently edited by J. R. Lothian

More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Haili He ().

Page updated 2020-05-02
Handle: RePEc:eee:jimfin:v:93:y:2019:i:c:p:201-222