Foreign exchange market pressure and capital controls

• Published in: Journal of international financial markets, institutions & money institutions & money, 2015-07, Vol.37, p.42-53
• Main Authors: Akram, Gilal Muhammad, Byrne, Joseph P.
• Format: Article
• Language: English
• Subjects: Capital controls; Currencies; Economic theory; Empirical research; Exchange market; Exchange market pressure; Financial liberalization; Foreign exchange; Foreign exchange markets; International trade; Macroeconomics; Manycountries; Monetary policy; Studies
• ISSN: 1042-4431; 1873-0612
• DOI: 10.1016/j.intfin.2015.04.004

•This paper examines the relationship between foreign exchange market pressure and capital controls.•Capital controls have a positive link with exchange market pressure, especially for advanced economies.•We find little evidence that acute foreign exchange market stress is associated with capital controls. This novel empirical study contributes to the literature on the foreign exchange market and financial liberalisation. We examine the determinants of exchange market pressure (EMP) in a panel of forty countries, using a statistical approach to measure market pressure, with particular focus upon the impact of capital controls. We also consider whether EMP is related to a range of other macroeconomic indicators, policy variables and trade openness. We find that capital controls are associated with weaker currencies, especially for advanced countries. Our results are robust to potential endogeneity and different measures of exchange market pressure.