The Effects of Capital Controls on Exchange Rate Volatility and Output

29 Pages Posted: 3 Feb 2006

See all articles by Michael Frenkel

Michael Frenkel

WHU Otto Beisheim Graduate School of Management

Georg Stadtmann

WHU Otto Beisheim School of Management

Gunter Schmidt

WHU Otto Beisheim Graduate School of Management

Christiane Nickel

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

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

Frenkel, Michael and Stadtmann, Georg and Schmidt, Gunter and Nickel, Christiane, The Effects of Capital Controls on Exchange Rate Volatility and Output (November 2001). IMF Working Paper No. 01/187, Available at SSRN: https://ssrn.com/abstract=880282

Michael Frenkel (Contact Author)

WHU Otto Beisheim Graduate School of Management ( email )

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

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)

Gunter Schmidt

WHU Otto Beisheim Graduate School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Christiane Nickel

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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