Capital controls and the volatility of the renminbi covered interest deviation

Zhitao Lin, Jinzhao Chen and Xingwang Qian
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Zhitao Lin: College of Economics and Institute of Finance, Jinan University, Guangzhou

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Abstract: This paper examines how capital controls affect the volatility of the renminbi (RMB) covered interest deviation (CID). We find that capital controls amplify the volatility of RMB CID and the amplification effect becomes more prominent in more flexible RMB exchange regimes. Capital controls influence the volatility of interest rate differential (IRD) and forward premium (FP), two components of CID, differently, particularly during the U.S. Fed's QE era. In addition, using an error correction model, we show that, while capital controls magnify both the short-and longrun volatility of the CID and the IRD, they do not affect FP volatility.

Keywords: Capital controls; RMB CID volatility; amplification effect; interest rate differential; forward premium (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-cba and nep-mon
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Published in Review of International Economics, 2021, 30 (1), pp.205-236. ⟨10.1111/roie.12563⟩

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Journal Article: Capital controls and the volatility of the renminbi covered interest deviation (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-03436233

DOI: 10.1111/roie.12563

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