Working Paper: NBER ID: w11434
Authors: Sebastian Edwards; Roberto Rigobon
Abstract: We use high frequency data and a new econometric methodology to evaluate the effectiveness of controls on capital inflows. We focus on Chile's experience during the 1990s and investigate whether controls on capital inflows reduced Chile's vulnerability to external shocks. We recognize that changes in the controls will affect the way in which different macro variables relate to each other. We take this problem seriously, and we develop a methodology to deal explicitly with it. The main findings may be summarized as follows: (a) A tightening of capital controls on inflows depreciates the exchange rate. (b) We find that the "vulnerability" of the nominal exchange rate to external factors decreases with a tightening of the capital controls. And (c), we find that a tightening of capital controls increases the unconditional volatility of the exchange rate, but makes this volatility less sensitive to external shocks.
Keywords: No keywords provided
JEL Codes: F30; F32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tightening of capital controls on inflows (F38) | Depreciation of the exchange rate (F31) |
| Tightening of capital controls on inflows (F38) | Decrease in vulnerability of the nominal exchange rate to external factors (F31) |
| Tightening of capital controls on inflows (F38) | Increase in unconditional volatility of the exchange rate (F31) |
| Tightening of capital controls on inflows (F38) | Less sensitivity of exchange rate volatility to external shocks (F31) |