Arbeitspapier

Capital controls and foreign exchange policy

The empirical analysis of the paper suggests that an FX policy objective and concerns about an overheating of the domestic economy have been the two main motives for the (re-)introduction and persistence of capital controls over the past decade. Capital controls are strongly associated with countries having significantly undervalued exchange rates. Capital controls also appear to be less motivated by worries about financial market volatility or fickle capital flows per se, but rather by concerns about capital inflows triggering an overheating of the economy – in the form of high credit growth, rising inflation and output volatility. Moreover, countries with a high level of capital controls, and those actively implementing controls, tend to be those that have fixed exchange rate regimes, a non-IT monetary policy regime and shallow financial markets. This evidence is consistent with capital controls being used, at least in part, to compensate for the absence of autonomous macroeconomic and prudential policies and effective adjustment mechanisms for dealing with capital flows.

Language
Englisch

Bibliographic citation
Series: ECB Working Paper ; No. 1415

Classification
Wirtschaft
International Finance: General
Foreign Exchange
Financial Institutions and Services: General
Subject
Capital controls
Capital flows
Economic policy
Exchange Rates
financial stability

Event
Geistige Schöpfung
(who)
Fratzscher, Marcel
Event
Veröffentlichung
(who)
European Central Bank (ECB)
(where)
Frankfurt a. M.
(when)
2012

Handle
Last update
10.03.2025, 11:43 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Fratzscher, Marcel
  • European Central Bank (ECB)

Time of origin

  • 2012

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