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Capital controls and foreign reserves against external shocks: Combined or alone?

Author

Listed:
  • Rafael Cezar

    (Banque de France - Banque de France - Banque de France)

  • Eric Monnet

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract
Long considered suboptimal, capital controls and FX interventions are now recognized as prudential measures. Yet, whether they are 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 reserves and capital controls are combined to tame the effects of an international financial shock. Yet, as countries open up financially, FX reserves replace capital controls. There is no one-sizes-fits-all recipe.

Suggested Citation

  • Rafael Cezar & Eric Monnet, 2023. "Capital controls and foreign reserves against external shocks: Combined or alone?," Post-Print halshs-04409575, HAL.
    • Handle: RePEc:hal:journl:halshs-04409575
    DOI: 10.1016/j.jimonfin.2023.102906
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    1. Aizenman, Joshua & Ho, Sy-Hoa & Huynh, Luu Duc Toan & Saadaoui, Jamel & Uddin, Gazi Salah, 2024. "Real exchange rate and international reserves in the era of financial integration," Journal of International Money and Finance, Elsevier, vol. 141(C).
    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; Global financial 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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