Does Capital Control Policy Affect Real Exchange Rate Volatility? A Novel Approach Using Propensity Score Matching

Abstract

Propensity score matching is a statistical technique recently introduced in the field of economics, which researchers use to assess the treatment effect of policy initiatives. In this study I use propensity score matching to analyze the treatment effect of capital control policy on real exchange rate volatility. I find the treatment effect of adopting relatively liberal capital controls is a decrease in real exchange rate volatility. This is the first empirical study to provide insight into the causal relationship between capital controls and real exchange rates, which may be crucial to macroeconomic policy decisions for emerging economies such as China.