The Effects of Capital Controls on Exchange Rate Volatility and Output
29 Pages Posted: 3 Feb 2006
There are 2 versions of this paper
The Effects of Capital Controls on Exchange Rate Volatility and Output
Date Written: November 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: Suggested Citation
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