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Capital Controls and Foreign Reserves against External Shocks: Combined or Alone?

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  • Rafael Cezar
  • Eric Monnet
Abstract
Long considered suboptimal, capital controls and FX interventions are now recognized as prudential measures. Yet, whether they should be used in combination remains an open question. Thanks to a rich dataset from 1950, we investigate how the response of FX reserves to an exogenous US monetary shock depends on capital controls. The response is insignificant with a very close capital account. By contrast, for a significant number of countries, FX interventions and capital controls are combined to tame the effects of an international financial shock. Yet, as countries open up financially, FX interventions replace capital controls. There is no one-sizes-fits-all recipe.

Suggested Citation

  • Rafael Cezar & Eric Monnet, 2021. "Capital Controls and Foreign Reserves against External Shocks: Combined or Alone?," Working papers 849, Banque de France.
    • Handle: RePEc:bfr:banfra:849
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    2. Elizabeth Bucacos & Javier García-Cicco & Miguel Mello, 2023. "Foreign Exchange Interventions and Foreign Shocks. The case of Uruguay," Documentos de trabajo 2023008, Banco Central del Uruguay.

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    More about this item

    Keywords

    Capital Controls ; Foreign Exchange Interventions ; Foreign Exchange Reserves ; GlobalvFinancial Cycle;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls

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