The Effects of Capital Controls on Exchange Rate Volatility and Output

31 Pages Posted: 10 Jan 2002

See all articles by Michael Frenkel

Michael Frenkel

WHU Otto Beisheim Graduate School of Management

Christiane Nickel

European Central Bank (ECB)

Gunter Schmidt

WHU Otto Beisheim Graduate School of Management

Georg Stadtmann

WHU Otto Beisheim School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: December 19, 2001

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: Capital controls, capital flows

JEL Classification: F32, F41

Suggested Citation

Frenkel, Michael and Nickel, Christiane and Schmidt, Gunter and Stadtmann, Georg, The Effects of Capital Controls on Exchange Rate Volatility and Output (December 19, 2001). Available at SSRN: https://ssrn.com/abstract=294481 or http://dx.doi.org/10.2139/ssrn.294481

Michael Frenkel

WHU Otto Beisheim Graduate School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany
0049 261 6509281 (Phone)
0049 261 6509279 (Fax)

Christiane Nickel (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Gunter Schmidt

WHU Otto Beisheim Graduate School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Georg Stadtmann

WHU Otto Beisheim School of Management ( email )

Burgplatz 2
D-56179 Vallendar
Germany
+49 261 6509 273 (Phone)
+49 261 6509 279 (Fax)