A double-edged sword : high interest rates in capital-control regimes

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Titill: A double-edged sword : high interest rates in capital-control regimesA double-edged sword : high interest rates in capital-control regimes
Höfundur: Gylfi Zoëga 1963
URI: http://hdl.handle.net/10802/4781
Útgefandi: Central Bank of Iceland, Economics Department
Útgáfa: 11.2009
Ritröð: Central Bank of Iceland., Working papers ; 47
Efnisorð: Efnahagskreppur; Fjárfestingar; Vextir; Gjaldeyrishöft; Efnahagsstefna
ISSN: 1028-9445
Tungumál: Enska
Tengd vefsíðuslóð: http://www.sedlabanki.is/lisalib/getfile.aspx?itemid=7477
Tegund: Skýrsla
Gegnir ID: 991009396209706886
Athugasemdir: Myndefni: línurit
Útdráttur: This paper derives the relationship between central bank interest rates and exchange rates under a capital control regime. Higher interest rate may strengthen the currency by reducing consumption and imports and by inducing foreign owners of local currency assets not to sell local currency off shore. There is also an effect that goes in the opposite direction: Higher interest rates increase the flow of interest income to foreigners through the current account which makes the exchange rate fall. The historical financial crisis now under way in Iceland provides excellent testing grounds for the analysis. Overall, the experience does not suggest that cutting interest rates moderately from a very high level is likely to make a currency depreciate in a capital control regime but highlights the importance of effective enforcing of the controls.


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