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Restrictions on the Capital Movement as a Factor of the Domestic and Foreign Interest Rates Spread

Student: Shukhovtseva Daria

Supervisor: Peter Meylakhs

Faculty: St.Petersburg School of Economics and Management

Educational Programme: Economics (Bachelor)

Year of Graduation: 2020

The restriction on the capital movement can be used as a macroeconomic tool that can partially minimize market distortions, but at the same time entail other negative consequences. One of these consequences may be a deviation from the covered interest rate parity - a special case of the spread between domestic and foreign interest rates. Deviations from parity allow investors to earn additional arbitrage profit, so the study of the factors affecting these deviations is relevant. In this work, two regressions proposed by Straetmans, Versteeg, Wolff in 2013 are used and adapted to the specifics of this study - the basic regression of the covered interest rate parity and the regression of the covered interest rate parity with the inclusion of controls of both capital inflow and outflow. D-OLS with HAC errors and VECM are used to evaluate them. The assumption that the covered interest parity is not observed in practice is considered, and different results are expected for different developing countries due to the instability of inflation. Data from 2010 to 2017 for Turkey, Russia and India is used in this work. Key words: capital control, capital inflow, capital outflow, covered interest parity, interest rate spread, arbitrage profit

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