Capital Flow Deflection

Abstract

This paper focuses on the coordination problem among borrowing countries imposing controls on capital inflows. In a simple model of capital flows and controls, we show that inflow restrictions distort international capital flows to other countries and that, in turn, such capital flow deflection may lead to a policy response. We then test the theory using data on inflow restrictions and gross capital inflows for a large sample of developing countries between 1995 and 2009. Our estimation yields strong evidence that capital controls deflect capital flows to other borrowing countries with similar economic characteristics. Notwithstanding these strong cross-border spillover effects, we do not find evidence of a policy response. JEL No.: F3, F4, F5.

Domestic and multilateral effects of capital controls in emerging markets

“…Inflow and outflow measures -Spillover effects: Impulse responses in the baseline model Our finding that capital controls entail spillovers to policy in other countries is supported by theory, but we are among the first to find empirical evidence supporting such spillovers Giordani et al (2017). present a model in which an increase in capital controls causes a similar policy response in another country.…”

“…However, Giordani et al (2017) do not find empirical support for this preposition. The most likely explanation seems to be the fact that their dataset for capital controls (based on the Fernandez et al (2016) index) does not capture the intensive margin of capital controls and is thus less suited for this type of analysis (see Section 5.2).…”

“…Studies using country-specific VARs include Cardoso and Goldfajn (1998), De Gregorio et al (2000) and Baba and Kokenyne (2011). 4 years and the impact of one country's capital controls (Forbes et al, 2016;Lambert et al, 2011), one region (Chantapacdepong and Shim, 2015) or uses less precise measures of capital controls (Beirne and Friedrich, 2014;Giordani et al, 2017). We provide evidence that spillovers for the largest EMEs transcended regions and became stronger in the post-crisis environment of abundant global liquidity.…”

“…A recent event study byForbes et al (2016) suggests that capital flow measures in Brazil spilled over to other countries Giordani et al (2017). find that capital controls during 1995-2009 deflected capital flows to other countries with similar economic characteristics, but they do not find evidence of a policy response in those countries.…”

Macroprudential policies, capital flows, and the structure of the banking sector

“…The authors find that spillovers are heterogeneous across countries: countries that are perceived as likely to implement capital controls in the near future receive lower portfolio weights, while countries that are located in the same region, that are of similar weight in the benchmark index, and that benefit from growth in China, are likely to receive higher portfolio weights. More recently, Giordani et al (2014) show for a sample of 78 developing countries that capital controls deflect capital flows to other borrowing countries with similar macroeconomic characteristics. Using bilateral data on cross-border bank flows from 31 source countries to 76 recipient countries, Ghosh et al (2014) find that imposing capital controls and MPPs is associated with larger flows to other countries.…”