Controlling capital? Legal restrictions and the asset composition of international financial flows

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractLegal restrictions on international capital movements are imposed in many countries in an attempt to (partially) insulate their economies from abroad and pursue some degree of domestic policy independence. But is the imposition of capital controls effective in achieving these goals? We investigate this issue from a new angle by linking de jure restrictions on three specific asset categories of outflows and inflows with the corresponding component of capital flows. The analysis is based on a novel panel data set of capital controls data, disaggregated by asset class and by inflows/outflows, and covering 74 countries during 1995-2005. Using panel LSDV regressions, and including a host of well-known determinants of capital flows, we estimate a model of capital flows with four categories: equity-like flows (including FDI) and debt for both capital inflows and capital outflows. The estimated effects of capital controls vary markedly with the type of controls imposed: they are binding on capital outflows (debt, equity and FDI); have no apparent effect on capital inflows of various types; and are less effective in low and middle-income countries. Moreover, there are no apparent substitution effects so that controls on debt and equity outflows change the volume and composition of capital flows as well as the net flow of capital in each asset class. The large differences across asset categories in the effects of capital controls suggest that the common use of aggregate capital control indicators can be misleading.JEL Classification: F21; F32; F36

Did the Indian Capital Controls Work as a Tool of Macroeconomic Policy?

“…The failure of capital controls in adequately controlling the volume of inflows in a surge is consistent with the evidence for other countries (Magud et al, 2011;Binici et al, 2010;Ostry et al, 2010). Controls appear to be more effective in dealing with temporary surges in capital flows .…”

“…However, the empirical literature on the effectiveness of capital controls lacks a common methodology (Magud et al, 2011;Kokenyne and Baba, 2011;Binici et al, 2010;Habermeier et al, 2011). There are multiple definitions of what constitutes a success of capital controls.…”

“…The empirical literature on the effectiveness of capital controls suggests that while controls may not be very effective in reducing the magnitude of capital inflows, they may be able to influence the composition of flows (Magud et al, 2011;Ostry et al, 2010;Binici et al, 2010;Habermeier et al, 2011). The initial effectiveness of controls on the composition of flows tends to dissipate as agents find ways to circumvent these controls (Ostry et al, 2010).…”

Exchange Rates and Portfolio Rebalancing: Evidence from Emerging Economies

“…The effect of such actions on exchange rates remains an open question. While early studies suggest that capital controls and central bank interventions have short-term effects on exchange rates (Magud et al, 2011), recent research indicates that these actions are ineffective in changing the trend for emerging currencies (Binici et al, 2009;Rincon & Toro, 2010;Baba & Kokenyne, 2011;Concha & Galindo, 2011;Magud et al, 2011) (Note 2). Therefore, in contrast to developed economies, the correlation structure between exchange rates and excess emerging stock market returns is affected by several factors including the magnitude of net equity inflows to emerging economies, the impact of capital controls and central bank interventions on the foreign exchange markets, and the significance of portfolio rebalancing by international investors.…”

When are Capital Controls Effective? Evidence from Malaysia and Thailand

“…One of the key distinctions of our study is constructing de jure capital account restriction indexes as in Schindler (2009) and Binici et al (2010) but using high-frequency information on a monthly basis, published by the central banks to construct quarterly indexes. Most previous studies use annual information from the Annual Report on Exchange Arrangement and Exchange Restrictions published by the International Monetary Fund (IMF) to construct capital restriction indexes.…”