Curbing capital outflows: Were the capital controls effective?

Abstract

This paper focuses on the effectiveness of the Icelandic capital controls, i.e. how well the Central Bank of Iceland managed to control the outflow of capital. The study uses high frequency financial data, with an emphasis on exchange rate movements, to detect whether significant changes occurred after the controls were implemented. A GARCH estimation and a Quandt-Andrews test are used to test the theory that noticeable changes occurred in the exchange rate movements of the ISK after capital controls on outflows and inflows were put in place. From the study it can be concluded that the ISK appreciated in the second phase of the controls, or from October 2009, and that exchange rate volatility decreased soon after the controls were implemented in the fall of 2008. The Central Bank’s intervention in the foreign currency market from October 2008 is an indication that the capital controls were not effective until surveillance of capital outflows was tightened a year later.