The Multiple Effects of Capital Controls
DOI:
https://doi.org/10.18778/1508-2008.23.33Keywords:
capital, controls, flows, impactsAbstract
Capital controls are seen as a means to promote financial stability or improve macroeconomic adjustment in economies with nominal rigidities and suboptimal monetary policy. Such controls may take various forms, including explicit or implicit taxation of cross‑border financial flows and dual or multiple exchange rate systems. Using a quarter dataset on capital controls actions in 27 emerging economies from 2010 to 2018, the study analyzes the effectiveness of capital controls (CCs) along different angles. Since the 2008 financial crisis, strengthening capital controls has allowed more monetary policy autonomy and exchange rate stability, verifying the Mundell‑Fleming trilemma model. Following CCs, the results show that accumulating international reserves may compensate for the loss of inflows and lead to more effective policies. Tighter CCs on inflows cause significant spillovers, specifically in the conditions of liquidity abundance. These spillovers originate from the problem of policy coordination of emerging economies and are mainly caused by capital controls being used as an instrument to manage capital flows. For governments that have to manage the risks associated with inflow surges or disruptive outflows, capital controls need to play a key role.
Downloads
References
Alfaro, L., Chari, A., Kanczuk, F. (2017), The real effects of capital controls: Firm-level evidence from a policy experiment, “Journal of International Economics”, 108, pp. 191–210. http://dx.doi.org/10.1016/j.jinteco.2017.06.004
Google Scholar
DOI: https://doi.org/10.1016/j.jinteco.2017.06.004
Bayoumi, T., Gagnon, J., Saborowski, C. (2015), Official financial flows, capital mobility, and global imbalances, “Journal of International Money and Finance”, 52, pp. 146–174. http://dx.doi.org/10.1016/j.jimonfin.2014.11.017
Google Scholar
DOI: https://doi.org/10.1016/j.jimonfin.2014.11.017
Benigno, G., Chen, H., Otrok, C., Rebucci, A., Young, E.R. (2013), Financial crises and macro-prudential policies, “Journal of International Economics”, 89 (2), pp. 453–470. http://dx.doi.org/10.1016/j.jinteco.2012.06.002
Google Scholar
DOI: https://doi.org/10.1016/j.jinteco.2012.06.002
Benigno, G., Chen, H., Otrok, C., Rebucci, A., Young, E.R. (2016), Optimal capital controls and real exchange rate policies: A pecuniary externality perspective, “Journal of Monetary Economics”, 84, pp. 147–165. http://dx.doi.org/10.1016/j.jmoneco.2016.10.004
Google Scholar
DOI: https://doi.org/10.1016/j.jmoneco.2016.10.004
Bianchi, J., Mendoza, M.E.G. (2011), Overborrowing, Financial Crises and “Macro Prudential’Policy?, No. 11–24, International Monetary Fund. https://doi.org/10.5089/9781455216710.001
Google Scholar
DOI: https://doi.org/10.5089/9781455216710.001
Bianchi, J., Hatchondo, J.C., Martinez, L. (2018), International reserves and rollover risk, “American Economic Review”, 108 (9), pp. 2629–2670. http://dx.doi.org/10.1257/aer.20140443
Google Scholar
DOI: https://doi.org/10.1257/aer.20140443
Borio, C., Gambacorta, L. (2017), Monetary policy and bank lending in a low interest rate environment: diminishing effectiveness?, “Journal of Macroeconomics”, 54, pp. 217–231. http://dx.doi.org/10.1016/j.jmacro.2017.02.005
Google Scholar
DOI: https://doi.org/10.1016/j.jmacro.2017.02.005
Chamon, M., Garcia, M. (2016), Capital controls in Brazil: effective?, “Journal of International Money and Finance”, 61, pp. 163–187. http://dx.doi.org/10.1016/j.jimonfin.2015.08.008
Google Scholar
DOI: https://doi.org/10.1016/j.jimonfin.2015.08.008
Chinn, M.D., Ito, H. (2008), A new measure of financial openness, “Journal of Comparative Policy Analysis”, 10 (3), pp. 309–322. http://dx.doi.org/10.1080/13876980802231123
Google Scholar
DOI: https://doi.org/10.1080/13876980802231123
Devereux, M.B., Young, E.R., Yu, C. (2017), Capital Controls, Monetary Policy, and Sudden Stops. http://dx.doi.org/10.1016/j.jmoneco.2018.07.016
Google Scholar
DOI: https://doi.org/10.1016/j.jmoneco.2018.07.016
Edison, H.J., Warnock, F.E. (2003), A simple measure of the intensity of capital controls, “Journal of Empirical Finance”, 10 (1–2), pp. 81–103. http://dx.doi.org/10.1016/S0927-5398(02)00055-5
Google Scholar
DOI: https://doi.org/10.1016/S0927-5398(02)00055-5
Farhi, E., Werning, I. (2014), Dilemma not trilemma? Capital controls and exchange rates with volatile capital flows, “IMF Economic Review”, 62 (4), pp. 569–605. http://dx.doi.org/10.1057/imfer.2014.25
Google Scholar
DOI: https://doi.org/10.1057/imfer.2014.25
Fernández, A., Rebucci, A., Uribe, M. (2015), Are capital controls countercyclical?, “Journal of Monetary Economics””, 76, pp. 1–14. http://dx.doi.org/10.1016/j.jmoneco.2015.07.001
Google Scholar
DOI: https://doi.org/10.1016/j.jmoneco.2015.07.001
Fernández, A., Klein, M.W., Rebucci, A., Schindler, M., Uribe, M. (2016), Capital control measures: A new dataset, “IMF Economic Review”, 64 (3), pp. 548–574. http://dx.doi.org/10.1057/imfer.2016.11
Google Scholar
DOI: https://doi.org/10.1057/imfer.2016.11
Forbes, K., Fratzscher, M., Straub, R. (2015), Capital flow management measures: What are they good for?, “Journal of International Economics”, 96, pp. S76–S97. http://dx.doi.org/10.1016/j.jinteco.2014.11.004
Google Scholar
DOI: https://doi.org/10.1016/j.jinteco.2014.11.004
Forbes, K., Reinhardt, D., Wieladek, T. (2017), The spillovers, interactions, and (un) intended consequences of monetary and regulatory policies, “Journal of Monetary Economics”, 85, pp. 1–22. http://dx.doi.org/10.1016/j.jmoneco.2016.10.008
Google Scholar
DOI: https://doi.org/10.1016/j.jmoneco.2016.10.008
Glick, R., Hutchison, M. (2005), Capital controls and exchange rate instability in developing economies, “Journal of International Money and Finance”, 24 (3), pp. 387–412, http://dx.doi.org/10.1016/j.jimonfin.2004.11.004
Google Scholar
DOI: https://doi.org/10.1016/j.jimonfin.2004.11.004
Ito, H., McCauley, R.N., Chan, T. (2015), Currency composition of reserves, trade invoicing and currency movements, “Emerging Markets Review”, 25, pp. 16–29. http://dx.doi.org/10.1016/j.ememar.2015.11.001
Google Scholar
DOI: https://doi.org/10.1016/j.ememar.2015.11.001
Jeanne, O. (2016), The macroprudential role of international reserves, “American Economic Review”, 106 (5), pp. 570–573. http://dx.doi.org/10.1257/aer.p20161013
Google Scholar
DOI: https://doi.org/10.1257/aer.p20161013
Kim, S., Yang, D.Y. (2012), International monetary transmission in East Asia: Floaters, non-floaters, and capital controls, “Japan and the World Economy”, 24 (4), pp. 305–316. http://dx.doi.org/10.1016/j.japwor.2012.05.003
Google Scholar
DOI: https://doi.org/10.1016/j.japwor.2012.05.003
Klein, M.W., Shambaugh, J.C. (2015), Rounding the corners of the policy trilemma: sources of monetary policy autonomy, “American Economic Journal: Macroeconomics”, 7 (4), pp. 33–66. http://dx.doi.org/10.1257/mac.20130237
Google Scholar
DOI: https://doi.org/10.1257/mac.20130237
Korinek, A. (2011), The new economics of prudential capital controls: A research agenda, “IMF Economic Review”, 59 (3), pp. 523–561. http://dx.doi.org/10.1057/imfer.2011.19
Google Scholar
DOI: https://doi.org/10.1057/imfer.2011.19
Korinek, A. (2018), Regulating capital flows to emerging markets: An externality view, “Journal of International Economics”, 111, pp. 61–80. http://dx.doi.org/10.1016/j.jinteco.2017.12.005
Google Scholar
DOI: https://doi.org/10.1016/j.jinteco.2017.12.005
Lambert, F.J., Ramos Tallada, J., Rebillard, C. (2011), Capital controls and spillover effects: evidence from Latin American countries, Banque de France Working Paper No. 357. http://dx.doi.org/10.2139/ssrn.1980091
Google Scholar
DOI: https://doi.org/10.2139/ssrn.1980091
Laséen, S., Pescatori, A., Turunen, J. (2017), Systemic risk: A new trade off for monetary policy?, “Journal of Financial Stability”, 32, pp. 70–85. http://dx.doi.org/10.1016/j.jfs.2017.08.002
Google Scholar
DOI: https://doi.org/10.1016/j.jfs.2017.08.002
Liu, Z., Spiegel, M.M. (2015), Optimal monetary policy and capital account restrictions in a small open economy, “IMF Economic Review”, 63 (2), pp. 298–324. http://dx.doi.org/10.1057/imfer.2015.8
Google Scholar
DOI: https://doi.org/10.1057/imfer.2015.8
Lu, Y., Tao, Z., Zhu, L. (2017), Identifying FDI spillovers, “Journal of International Economics”, 107, pp. 75–90. http://dx.doi.org/10.1016/j.jinteco.2017.01.006
Google Scholar
DOI: https://doi.org/10.1016/j.jinteco.2017.01.006
Magud, N.E., Reinhart, C.M., Rogoff, K.S. (2011), Capital controls: myth and reality - a portfolio balance approach, No. w16805, Peterson Institute for International Economics Working Paper No. 2011-07. http://dx.doi.org/10.2139/ssrn.1773692
Google Scholar
DOI: https://doi.org/10.3386/w16805
Magud, N.E., Reinhart, C.M., Rogoff, K.S. (2018), Capital controls: myth and reality – a portfolio balance approach, “Annals of Economics and Finance”, 19 (1), pp. 1–47.
Google Scholar
Ocampo, J.A., Spiegel, S., Stiglitz, J.E. (2008), Capital market liberalization and development, “Capital Market Liberalization and Development”, pp. 1–47. http://dx.doi.org/10.1093/acprof:oso/9780199230587.001.0001
Google Scholar
DOI: https://doi.org/10.1093/acprof:oso/9780199230587.003.0001
Pasricha, G.K., Falagiarda, M., Bijsterbosch, M., Aizenman, J. (2018), Domestic and multilateral effects of capital controls in emerging markets, “Journal of International Economics”, 115, pp. 48–58. http://dx.doi.org/10.1016/j.jinteco.2018.08.005
Google Scholar
DOI: https://doi.org/10.1016/j.jinteco.2018.08.005
Passari, E., Rey, H. (2015), Financial flows and the international monetary system, “The Economic Journal”, 125 (584), pp. 675–698. http://dx.doi.org/10.1111/ecoj.12268
Google Scholar
DOI: https://doi.org/10.1111/ecoj.12268
Qureshi, M.S., Ostry, J.D., Ghosh, A.R., Chamon, M. (2011), Managing capital inflows: The role of capital controls and prudential policies, No. w17363, NBER Working Paper Series. https://doi.org/10.3386/w17363
Google Scholar
DOI: https://doi.org/10.3386/w17363
Rebucci, A., Ma, C. (2019), Capital controls: A survey of the new literature, No. w26558, National Bureau of Economic Research. http://dx.doi.org/10.2139/ssrn.3495987
Google Scholar
DOI: https://doi.org/10.2139/ssrn.3495987
Rey, H. (2015), Dilemma not trilemma: the global financial cycle and monetary policy independence, No. w21162, National Bureau of Economic Research.
Google Scholar
DOI: https://doi.org/10.3386/w21162
Rudebusch, G.D., Williams, J.C. (2016), A wedge in the dual mandate: Monetary policy and long term unemployment, “Journal of Macroeconomics”, 47, 5–18. http://dx.doi.org/10.1016/j.jmacro.2015.05.001
Google Scholar
DOI: https://doi.org/10.1016/j.jmacro.2015.05.001
Zehri, C. (2020a), Capital Restrictions Policies, Currency Appreciation and Foreign Debts. “Montenegrin Journal of Economics”, 16 (3), 149–159. https://doi.org/10.14254/1800-5845/2020.16-3.12
Google Scholar
DOI: https://doi.org/10.14254/1800-5845/2020.16-3.12
Zehri, C. (2020b), Conditions for the success of capital controls: The elasticity approach. “International Journal of Finance & Economics”. Articles in press. https://doi.org/10.1002/ijfe.2182
Google Scholar
DOI: https://doi.org/10.1002/ijfe.2182
Downloads
Published
How to Cite
Issue
Section
License
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
