The Effects of Capital Controls on Exchange Rate Volatility and Output

Christiane Nickel, Günter Schmidt, Georg Stadtmann and Michael Frenkel

No 2001/187, IMF Working Papers from International Monetary Fund

Abstract: This paper extends the Dornbusch model of overshooting exchange rates to discuss both exchange rate and output effects of capital controls that involve additional costs for international asset transactions. We show that, on the one hand, such capital controls have the merit of reducing the volatility of exchange rates following a monetary shock. On the other hand, the implementation increases exchange rate volatility in the short run and induces costs for the real sector in the form of lower equilibrium output levels.

Keywords: WP; exchange rate; capital control; aggregate supply; interest rate; price level; capital controls; capital flows; exchange rate volatility; goods market; nominal exchange rate; exchange rate expectation; sovereign bond; expectations of the market; capital constraint; exchange rate effect; quantity control; purpose of the capital control; introduction of the capital control; effectiveness of the capital control; Exchange rates; Exchange rate adjustments; Capital inflows; Global (search for similar items in EconPapers)
Pages: 30
Date: 2001-11-01
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Citations: View citations in EconPapers (7)

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