Capital Controls, Exchange Rate Volatility, and the Risk Premium
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Capital Controls, Exchange Rate Volatility, and the Risk Premium
Frenkel, Michael | Stadtmann, Georg
Journal of Contextual Economics – Schmollers Jahrbuch, Vol. 124 (2004), Iss. 3 : pp. 371–386
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Frenkel, Michael
Stadtmann, Georg
Abstract
We use the Jeanne / Rose (2002) noise trader framework in foreign exchange markets to introduce a tax on international capital flows. As such a tax exerts two effects in opposite directions, we derive the capital control level that minimizes the risk premium and show the conditions under which a zero capital control level is optimal.