Download or read book The Effects of Capital Controls on Exchange Rate Volatility and Output written by Michael Frenkel and published by INTERNATIONAL MONETARY FUND. This book was released on 2001-11-01 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper extends the Dornbusch model of overshooting exchange rates to discuss both exchange rate and output effects of capital controls that involve additional costs for international asset transactions. We show that, on the one hand, such capital controls have the merit of reducing the volatility of exchange rates following a monetary shock. On the other hand, the implementation increases exchange rate volatility in the short run and induces costs for the real sector in the form of lower equilibrium output levels.