Controls on Capital Inflows: Do They Work?This paper analyzes the effectiveness of capital controls, in particular the Chilean experience with the use of the unremunerated reserve requirement. We examine the effects on interest rates, real exchange rate, and the volume and composition of capital inflows. The effects are elusive and it is difficult to pin down long-run effects. Although after the unremunerated reserve requirement was introduced there was an increase in the interest rate differential, the econometric evidence does not show it has a significant long-run effect on interest rate differentials. There are also no effects on the real exchange rate. However, the more persistent and significant effect is on the composition of capital inflows, tilting composition toward longer maturity. |
Common terms and phrases
12 months Andrei Shleifer Banco Central Bond Indicator Bureau of Economic Capital Controls capital inflows Central Bank Central de Chile Chilean choose the currency composition of capital consider CONTROLS ON CAPITAL controls on inflows cost-equivalent credit rating denominated denote deposit domestic interest rates Economic Research Effectiveness of Capital equation estimation exchange rate appreciated Exogenous variables expected depreciation Figure Foreign borrowing holding period impulse-response functions Inflows/GDP instrumental variables interest rate differentials interest rate parity interest rate-equivalent cost investment investor José De Gregorio Libor long-term flows loophole macroeconomic Massachusetts Avenue maturity measures monetary policy monthly data Nadal-De-Simone National Bureau NBER Working Papers papers in hard power index real exchange rate Response Functions Sendhil Mullainathan short term debt short-term flows system using monthly tax equivalent term flows UF/dollar Universidad de Chile unremunerated reserve requirement URR affected URR on capital URR shock Valdés Valdés-Prieto and Soto μ μ μ