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Capital Controls, Two-tiered Exchange Rate Systems and the Exchange Rate Policy : The South African Experience

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  • Schaling, E.

Abstract

South Africa's 40 years of experience with capital controls on residents and non‐residents (1961‐2001) reads like a collection of examples of perverse unanticipated effects of legislation and regulation. We show that the presence of capital controls on residents and non‐residents enabled the South African Reserve Bank to target domestic interest rates (and or the exchange rate) via interventions in the (commercial) foreign exchange market. This provides an early rationale for anchoring SA monetary policy via the exchange rate, rather than via domestic interest rates. This suggests not only that the capital controls themselves exhibited substantial institutional inertia, but that this same institutional inertia also applied to the monetary policy regime. A plausible reason for this is that for most of the 20th century in South Africa. (partial) capital controls and exchange rate based monetary policies were like Siamese twins – almost impossible to separate.
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Suggested Citation

  • Schaling, E., 2005. "Capital Controls, Two-tiered Exchange Rate Systems and the Exchange Rate Policy : The South African Experience," Discussion Paper 2005-110, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:ea18fcb8-feac-4f87-896b-321c9e114d62
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    1. Schaling, E., 2005. "Capital Controls, Two-tiered Exchange Rate Systems and the Exchange Rate Policy : The South African Experience," Other publications TiSEM ea18fcb8-feac-4f87-896b-3, Tilburg University, School of Economics and Management.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 1-48.
    3. Eric Schaling, 2009. "Capital Controls, Two‐Tiered Exchange Rate Systems And Exchange Rate Policy: The South African Experience," South African Journal of Economics, Economic Society of South Africa, vol. 77(4), pages 505-530, December.
    4. van der Windt, P.C. & Schaling, E. & Huizinga, H.P., 2007. "Capital Controls and Foreign Investor Subsidies Implicit in South Africa's Dual Exchange Rate System," Other publications TiSEM dfb41e00-b72a-4a54-916c-9, Tilburg University, School of Economics and Management.
    5. Huizinga, H.P., 1996. "The Taxation Implicit in Two-Tiered Exchange Rate Systems," Discussion Paper 1996-100, Tilburg University, Center for Economic Research.
    6. R. M. Gidlow, 1976. "Exchange Control and the Blocked Rand Mechanism," South African Journal of Economics, Economic Society of South Africa, vol. 44(1), pages 52-58, March.
    7. Martin Grandes & Marcel Peter & Nicolas Pinaud, 2003. "The Currency Premium and Local-Currency Denominated Debt Costs in South Africa," OECD Development Centre Working Papers 230, OECD Publishing.
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    Cited by:

    1. Peter Aling & Shakill Hassan, 2012. "No-Arbitrage One-Factor Models Of The South African Term Structure Of Interest Rates," South African Journal of Economics, Economic Society of South Africa, vol. 80(3), pages 301-318, September.
    2. van der Windt, P.C. & Schaling, E. & Huizinga, H.P., 2007. "Capital Controls and Foreign Investor Subsidies Implicit in South Africa's Dual Exchange Rate System," Discussion Paper 2007-91, Tilburg University, Center for Economic Research.
    3. Christopher Loewald, 2021. "Macro works applying integrated policy frameworks to South Africa," Working Papers 11016, South African Reserve Bank.
    4. Christopher Loewald, 2021. "Macro works a decisiontree approach to exchange rate policy," Working Papers 11009, South African Reserve Bank.
    5. Eric Schaling, 2009. "Capital Controls, Two‐Tiered Exchange Rate Systems And Exchange Rate Policy: The South African Experience," South African Journal of Economics, Economic Society of South Africa, vol. 77(4), pages 505-530, December.

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    More about this item

    Keywords

    capital controls; exchange rate mechanism;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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