A Double-Edged Sword: High Interest Rates in Capital Control Regimes
Abstract This paper describes the relationship between central bank interest rates and exchange rates under a capital control regime. Higher interest rates may strengthen the currency by inducing owners of local currency assets not to sell local currency offshore. There is also an effect that goes i...
Published in: | Economics |
---|---|
Main Authors: | , |
Format: | Article in Journal/Newspaper |
Language: | English |
Published: |
Walter de Gruyter GmbH
2016
|
Subjects: | |
Online Access: | http://dx.doi.org/10.5018/economics-ejournal.ja.2016-17 https://www.degruyter.com/document/doi/10.5018/economics-ejournal.ja.2016-17/xml https://www.degruyter.com/document/doi/10.5018/economics-ejournal.ja.2016-17/pdf |
id |
crdegruyter:10.5018/economics-ejournal.ja.2016-17 |
---|---|
record_format |
openpolar |
spelling |
crdegruyter:10.5018/economics-ejournal.ja.2016-17 2023-05-15T16:49:03+02:00 A Double-Edged Sword: High Interest Rates in Capital Control Regimes Gudmundsson, Gudmundur S. Zoega, Gylfi 2016 http://dx.doi.org/10.5018/economics-ejournal.ja.2016-17 https://www.degruyter.com/document/doi/10.5018/economics-ejournal.ja.2016-17/xml https://www.degruyter.com/document/doi/10.5018/economics-ejournal.ja.2016-17/pdf en eng Walter de Gruyter GmbH http://creativecommons.org/licenses/by/4.0 CC-BY Economics volume 10, issue 1 ISSN 1864-6042 General Economics, Econometrics and Finance journal-article 2016 crdegruyter https://doi.org/10.5018/economics-ejournal.ja.2016-17 2022-04-14T05:10:56Z Abstract This paper describes the relationship between central bank interest rates and exchange rates under a capital control regime. Higher interest rates may strengthen the currency by inducing owners of local currency assets not to sell local currency offshore. There is also an effect that goes in the opposite direction: higher interest rates may increase the flow of interest income to foreigners through the current account, making the exchange rate fall. The historical financial crisis in Iceland provides excellent testing grounds for the analysis. Overall, the Icelandic experience does not suggest that cutting interest rates in small steps from a very high level is likely to make a currency depreciate significantly in a capital control regime, but it highlights the importance of effective enforcement of the controls. Article in Journal/Newspaper Iceland De Gruyter (via Crossref) Economics 10 1 |
institution |
Open Polar |
collection |
De Gruyter (via Crossref) |
op_collection_id |
crdegruyter |
language |
English |
topic |
General Economics, Econometrics and Finance |
spellingShingle |
General Economics, Econometrics and Finance Gudmundsson, Gudmundur S. Zoega, Gylfi A Double-Edged Sword: High Interest Rates in Capital Control Regimes |
topic_facet |
General Economics, Econometrics and Finance |
description |
Abstract This paper describes the relationship between central bank interest rates and exchange rates under a capital control regime. Higher interest rates may strengthen the currency by inducing owners of local currency assets not to sell local currency offshore. There is also an effect that goes in the opposite direction: higher interest rates may increase the flow of interest income to foreigners through the current account, making the exchange rate fall. The historical financial crisis in Iceland provides excellent testing grounds for the analysis. Overall, the Icelandic experience does not suggest that cutting interest rates in small steps from a very high level is likely to make a currency depreciate significantly in a capital control regime, but it highlights the importance of effective enforcement of the controls. |
format |
Article in Journal/Newspaper |
author |
Gudmundsson, Gudmundur S. Zoega, Gylfi |
author_facet |
Gudmundsson, Gudmundur S. Zoega, Gylfi |
author_sort |
Gudmundsson, Gudmundur S. |
title |
A Double-Edged Sword: High Interest Rates in Capital Control Regimes |
title_short |
A Double-Edged Sword: High Interest Rates in Capital Control Regimes |
title_full |
A Double-Edged Sword: High Interest Rates in Capital Control Regimes |
title_fullStr |
A Double-Edged Sword: High Interest Rates in Capital Control Regimes |
title_full_unstemmed |
A Double-Edged Sword: High Interest Rates in Capital Control Regimes |
title_sort |
double-edged sword: high interest rates in capital control regimes |
publisher |
Walter de Gruyter GmbH |
publishDate |
2016 |
url |
http://dx.doi.org/10.5018/economics-ejournal.ja.2016-17 https://www.degruyter.com/document/doi/10.5018/economics-ejournal.ja.2016-17/xml https://www.degruyter.com/document/doi/10.5018/economics-ejournal.ja.2016-17/pdf |
genre |
Iceland |
genre_facet |
Iceland |
op_source |
Economics volume 10, issue 1 ISSN 1864-6042 |
op_rights |
http://creativecommons.org/licenses/by/4.0 |
op_rightsnorm |
CC-BY |
op_doi |
https://doi.org/10.5018/economics-ejournal.ja.2016-17 |
container_title |
Economics |
container_volume |
10 |
container_issue |
1 |
_version_ |
1766039107702620160 |