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Capital controls and foreign exchange market intervention in Colombia

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Disciplines
  • Economics

Abstract

Capital controls and foreign exchange market intervention in Colombia - BIS Papers No 23, part 9 May 2005 128 BIS Papers No 23 Capital controls and foreign exchange market intervention in Colombia José Darío Uribe1 1. Introduction This paper examines two aspects of the Colombian experience with capital flows between 1990 and 2003. First, it discusses capital account liberalisation, the evolution of external debt and the role of the price-based capital account regulations imposed in Colombia in September 1993. Second, it describes the intervention mechanisms set up by Banco de la República (the central bank) from September 1999 onwards, when the crawling exchange rate band system was abandoned and a free float was adopted in a fully fledged inflation targeting regime. The main conclusions are as follows: (i) the price-based capital account regulations improved the profile of external debt and may have reinforced monetary control in a period of strong capital inflows to the country; (ii) the low level of short-term external debt did not reduce Colombia’s vulnerability to the effects of a “sudden stop” in capital inflows to the region in the years 1998-99; (iii) the price-based capital account regulations (or non-remunerated deposits) provided an unwarranted protection to the domestic financial system that resulted in a broadening of intermediation margins, while simultaneously supporting the fiscal expansion of the period 1993-97; (iv) the development and use of an option-based auction mechanism to execute foreign exchange market intervention has allowed the central bank to achieve its foreign exchange intervention goals; and (v) the efficiency of a sterilised foreign exchange intervention performed to stop a devaluation - which compromises the inflation target - works primarily through the signalling effect sent to the market by the central bank. Selling a limited amount of international reserves does not seem to have a significant or lasting impact on

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