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Capital controls and international interest rate differentials

[journal article]

El-Shagi, Makram

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Abstract The literature on interest rate differentials caused by capital controls is mostly case based yet. The present paper tries to find general evidence how large the interest rate differentials - and thus the distortions of capital markets - actually are. Advocates of capital controls generally argue, that capital controls (should) affect capital flow composure rather than the total, analogue to Tobin's idea concerning currency markets only. Based on a new measure for capital controls, which is including information on the direction of the flows, which are subject to the control, it is shown here with a sample of 86 countries from 1997 to 2003, that the interest rate effects are to severe to sign this assumption. The results indicate, that capital controls, as they are commonly employed, have significant impact on interest rates, hence risking accordingly high growth impeding effects.
Classification Political Economy
Free Keywords Capital Controls; Financial Openness; Interest Rates; F21; F32
Document language English
Publication Year 2010
Page/Pages p. 681-688
Journal Applied Economics, 42 (2010) 6
Status Postprint; peer reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)