Hutchison, Michael and Kendall, Jake and Pasricha, Gurnain and Singh, Nirvikar (2010): Indian Capital Control Liberalization: Evidence from NDF Markets.
Download (215kB) | Preview
This paper analyzes the extent to which the effectiveness of capital controls in India have changed over time. We begin by calculating deviations from covered interest parity utilizing data from the 3-month offshore non-deliverable rupiah forward (NDF) market. Then, using the self-exciting threshold autoregression methodology, we estimate a no-arbitrage band whose boundaries are determined by transactions costs and by the effectiveness of capital controls. Inside the bands, small deviations from CIP follow a random walk process. Outside the bands, profitable arbitrage opportunities exist and we estimate an adjustment process back towards the boundaries. We identify three distinct periods, and estimate the model over each sub-sample in order to capture the de facto effect of changes in capital controls over time. We find that de facto capital control barriers: (1) are asymmetric over inflows and outflows, (2) have changed over time from primarily restricting outflows to effectively restricting inflows; (3) arbitrage activity closes deviations from CIP when the threshold boundaries are exceeded in all sub-samples. In recent years, capital controls have been more symmetric over capital inflows and outflows and the deviations from CIP outside the boundaries are closed more quickly.
|Item Type:||MPRA Paper|
|Original Title:||Indian Capital Control Liberalization: Evidence from NDF Markets|
|Keywords:||capital controls; India; arbitrage; non-deliverable forward markets; covered interest parity; self-exciting autoregressive threshold model|
|Subjects:||F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration
|Depositing User:||Nirvikar Singh|
|Date Deposited:||19. Aug 2010 00:47|
|Last Modified:||14. Feb 2013 14:50|
Bai, J. and P. Perron (2003). “Computation and Analysis of Multiple Structural Change Models,” Journal of Applied Econometrics 18: 1-22.
Chinn, Menzie and Ito, Hiro (2007) “A New Measure of Financial Openness”, mimeo, (May 2007), forthcoming in Journal of Comparative Policy Analysis.
Cheung, Y.W., Tam, D., Yiu, M.S. (2006) “Does the Chinese Interest Rate Follow the US Interest Rate?” Hong Kong Institute of Monetary Research Working Paper No 19/2006.
Frenkel, J.A. and R.M. Levich (1975). “Covered Interest Arbitrage: Unexploited Profits?” Journal of Political Economy 83, 325-338.
Hansen, Bruce E., (1996). “Inference when a nuisance parameter is not identified under the null hypothesis.” Econometrica 64, pp. 413-430.
Hansen, Bruce E. (1999a). “Threshold effects in non-dynamic panels: Estimation, testing, and inference,” Journal of Econometrics, pp. 345-368.
Hansen, Bruce E. (1999b). “Testing for linearity,” Journal of Economic Surveys, pp. 551-576.
Hansen, Bruce E. (2000). “Sample Splitting and Threshold Estimation,” Econometrica, Vol. 68, No. 3, pp. 575-603
Jadhav, Narendra (2003). Capital Account Liberalisation: The Indian Experience, available at http://www.imf.org/external/np/apd/seminars/2003/newdelhi/jadhav.pdf.
Levy Yeyati, Eduardo, Sergio L. Schmukler and Neeltje Van Horen (2006). “International Financial Integration through the Law of One Price,” World Bank Policy Research Working Paper No. 3897
Lipscomb, Laura (2005). “An Overview of Non-Deliverable Foreign Exchange Forward Markets,” Federal Reserve Bank of New York, May.
Liu, L., Otani, O. (2005) “Capital Controls and Interest Rate Parity: Evidences from China, 1999-2004.” Working Paper, March 2005
Ma, G., McCauley, R. (2007) “Do China’s Capital Controls Still Bind? Implications for Monetary Autonomy and Capital Liberalization.” Bank of International Settlements, Working Paper No. 233, August 2007.
Ma, G., Ho, C., McCauley, R. (2004) “The Markets for Non-Deliverable Forwards in Asian Currencies.” BIS Quarterly Review, June 2004, pp.81-94.
Misra, Sangita and Behera, Harendra (2006), “Non-Deliverable Forward Exchange Market: An Overview,” Reserve Bank of India Occasional Papers, 27(3), Winter 2006.
Pasricha, Gurnain (2008) “Financial Integration in Emerging Market Economies,” Department of Economics Working Paper No. 641, University of California, Santa Cruz.
Peel, D.A., Taylor, M.P. (2002) “Covered Interest Rate Arbitrage in the Inter-war period and the Keynes-Einzig Conjecture,” Journal of Money, Credit and Banking, 34, 51-75.
Potter, Simon (1999). “Nonlinear time-series modeling: An introduction,” FRB of New York Staff Report No. 87.
Obstfeld, M., Taylor, A.M. (2004) Global Capital Markets: Integration, Crisis and Growth, Cambridge University Press, Cambridge, UK.
Reserve Bank of India (2005), “RBI Governor announces Annual Policy Statement for the year 2005-06”, Press Relations Division, RBI, Mumbai, April 28.
Shah, Ajay, and Patnaik, Ila. (2005) “India’s Experience with Capital Flows: The Elusive Quest for a Sustainable Current Account Deficit,” Working Paper 11387, National Bureau of Economic Research, Cambridge, MA.
Taylor, A.M. (2001). “Potential Pitfalls for the Purchasing-Power-Parity Puzzle? Sampling and Specification Biases in Mean-Reversion Tests of the Law of One Price,” Econometrica, 69(2), pp. 473-498.
Taylor, M.P. (1989). “Covered Interest Arbitrage and Market Turbulence.” Economic Journal 99, 376-391.
Tong, H. (1978). “On a threshold model,” in Pattern Recognition and Signal Processing. C.H. Chen (editor), Amsterdam, Sijhoff and Noordhof.
Tsay, R.S. (1989). “Testing and modeling threshold autoregressive processes.” Journal of the American Statistical Association 84: 231-240.