Are Capital Controls and Central Bank Intervention Effective?

Hernan Rincon-Castro and Jorge Hernán Toro-Córdoba

No 7622, Borradores de Economia from Banco de la Republica

Abstract: Capital controls and intervention in the foreign exchange market are two controversial policy options that many countries have adopted in the past in order to influence the exchange rate and moderate capital flows. Colombia has a long record in the use of these policies with mixed results and often non negligible costs. The objective of this paper is to evaluate for the case of Colombia the effectiveness of capital controls and central bank intervention for depreciating the exchange rate, reducing its volatility, and moderating the exchange rate vulnerability to external shocks. The paper uses high frequency data from 1993 to 2010, and a GARCH model of the peso/US dollar exchange rate return. The main findings indicate that neither capital controls nor central bank intervention used separately were successful for depreciating the exchange rate. On the contrary, they augmented its volatility. Nonetheless, when both policies were used simultaneously, a statistical significant effect was obtained by which the interaction of capital control and intervention in the foreign exchange market were effective to produce a daily average depreciation of the exchange rate, without increasing its volatility. This result however should be taken with caution given the special economic circumstances that characterized 2008, when most of this interaction happened.

Keywords: Capital controls (Tobin tax); central bank intervention; GARCH regression model of the exchange rate return; effectiveness. (search for similar items in EconPapers)
JEL-codes: C52 E58 F31 F32 (search for similar items in EconPapers)
Pages: 42
Date: 2010-10-20
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (53)

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Related works:
Working Paper: Are Capital Controls and Central Bank Intervention Effective? (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:col:000094:007622

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