A double-edged sword: High interest rates in capital control regimes

Gudmundur S. Gudmundsson and Gylfi Zoega

Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), 2016, vol. 10, No 2016-17, 38 pages

Abstract: This paper describes the relationship between central bank interest rates and exchange rates under a capital control regime. Higher interest rates may strengthen the currency by inducing owners of local currency assets not to sell local currency offshore. There is also an effect that goes in the opposite direction: higher interest rates may increase the flow of interest income to foreigners through the current account, making the exchange rate fall. The historical financial crisis in Iceland provides excellent testing grounds for the analysis. Overall, the Icelandic experience does not suggest that cutting interest rates in small steps from a very high level is likely to make a currency depreciate significantly in a capital control regime, but it highlights the importance of effective enforcement of the controls.

Keywords: financial crises; capital controls; policy rates; exchange rates (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 G01 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://dx.doi.org/10.5018/economics-ejournal.ja.2016-17
https://www.econstor.eu/bitstream/10419/142708/1/862380200.pdf (application/pdf)

Related works:
Working Paper: A double-edged sword: High interest rates in capital control regimes (2016)
Working Paper: A Double-edged Sword: High Interest Rates in Capital-control Regimes (2010)
Working Paper: A double-edged sword. High interest rates in capital-control regimes (2009)
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: https://EconPapers.repec.org/RePEc:zbw:ifweej:201617

DOI: 10.5018/economics-ejournal.ja.2016-17

Access Statistics for this article

Economics - The Open-Access, Open-Assessment E-Journal (2007-2020) is currently edited by Dennis J. Snower

More articles in Economics - The Open-Access, Open-Assessment E-Journal (2007-2020) from Kiel Institute for the World Economy (IfW Kiel) Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().