The Effects of Capital Controls on Exchange Rate Volatility and Output

Author/Editor:

Christiane Nickel ; Günter Schmidt ; Georg Stadtmann ; Michael Frenkel

Publication Date:

November 1, 2001

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 01/187

Subject:

English

Publication Date:

November 1, 2001

ISBN/ISSN:

9781451859515/1018-5941

Stock No:

WPIEA1872001

Format:

Paper

Pages:

30

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