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Capital controls and the volatility of the renminbi covered interest deviation

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  • Zhitao Lin
  • Jinzhao Chen
  • Xingwang Qian

Abstract

This paper examines how capital controls affect the volatility of the renminbi (RMB) covered interest deviation (CID). We find that capital controls amplify the volatility of RMB CID and the amplification effect becomes more prominent in more flexible RMB exchange regimes. Capital controls influence the volatility of interest rate differential (IRD) and forward premium (FP), two components of CID, differently, particularly during the U.S. Fed's QE era. In addition, using an error correction model, we show that, while capital controls magnify both the short‐ and long‐run volatility of the CID and the IRD, they do not affect FP volatility.

Suggested Citation

  • Zhitao Lin & Jinzhao Chen & Xingwang Qian, 2022. "Capital controls and the volatility of the renminbi covered interest deviation," Review of International Economics, Wiley Blackwell, vol. 30(1), pages 205-236, February.
    • Handle: RePEc:bla:reviec:v:30:y:2022:i:1:p:205-236
    DOI: 10.1111/roie.12563
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