Do Macroeconomic Effects of Capital Controls Vary by their Type? Evidence From Malaysia

Tamirisa, Natalia

doi:10.5089/9781451841930.001

Cited by 15 publications

(7 citation statements)

References 13 publications

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“…The decision for governments may be between possible short-term advantage and the potential for long-term increases in the cost of attracting international capital (including to the government debt market) as a result of a damaged reputation. There is still considerable debate regarding both the short-term and long-term impact of the Malaysian decision (Athukorala 2003;Edison and Reinhart 2000;Dornbusch 2001;Kaplan and Rodrik 2001;Krugman 1999;Tamarisa 2004), but there is little doubt that it allowed Malaysia to pursue (at least temporarily) a heterodox economic policy. Another measure also implemented during the Asian crisis is to make hedge fund shorting more difficult by making borrowing more difficult.…”

Section: Is Financialization Inevitable?mentioning

confidence: 99%

Financialization and Government Borrowing Capacity in Emerging Markets

Hardie

2012

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Series Standing Order ISBN 978-0-333-71708-0 hardcover Series Standing Order ISBN 978-0-333-71110-1 paperback (outside North America only)You can receive future titles in this series as they are published by placing a standing order. Please contact your bookseller or, in case of diffi culty, write to us at the address below with your name and address, the title of the series and one of the ISBNs quoted above.

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Section: Is Financialization Inevitable?mentioning

confidence: 99%

Financialization and Government Borrowing Capacity in Emerging Markets

Hardie

2012

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“…A comparatively efficient Malaysian government sector, together with its experience in 1994 with inflow controls, may explain the relative success of authorities in driving wedges between domestic and international markets. Tamirisa (2004) also studied the Malaysian experience with capital controls, including the inflow restrictions authorities enforced in 1994. She distinguished between five types of controls and argued that they have had different effects on financial and macroeconomic variables.…”

Section: Introductionmentioning

confidence: 99%

Evaluating the Success of Malaysia's Exchange Controls (1998–99)

Abbas

Espinoza

2006

Oxford Development Studies

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This paper offers an original survey of the Malaysian crisis and the effects of the consequent imposition of capital controls by authorities in September 1998 and of their subsequent relaxation in February and September 1999. We identify Malaysia's unique strengths and weaknesses before the crisis, appreciate the differential timing and nature of the Malaysian crisis vis-à-vis the other neighbouring crisis countries, and distinguish carefully between the restrictive and incentive components of the imposed controls. Against this backdrop, we analyse both the "level" (first-order) effects and the "volatility" (second-order) effects of controls on key macroeconomic, banking and financial market variables. On the level effects, we found the Malaysian recovery (starting late 1998) to be at least as quick, strong and lasting as that of the other crisis countries, and discovered important channels of influence from controls to interest rates (which were lowered) and stock markets (which recovered dramatically). These results on the effectiveness of controls are consistent with earlier studies by Edison due to the longer time period used here, a stronger restatement of their conclusions is now possible. We study the secondorder effects of controls by introducing a Capital Asset Pricing Model (CAPM)-based portfolio choice model and show how controls, especially when they work as an asymmetric tax on short-term investment, reduce both the volume of speculative flows and the associated interest rate volatility. To test these theoretical results, we set up a standard Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model of interest rate and stock market volatility where capital control dummies are introduced in the variance equation. Our model is an improvement over earlier studies in two ways: a more sophisticated capital control dummy was used to take account of the relaxation of controls in February 1999; and we dealt with the problem of endogeneity in the mean equation by using regressors that are not Granger-caused by the regressand (Malaysian interest rate and stock returns). The model shows that controls did limit interest rate volatility in line with the theoretical prior, but worsened stock market volatility. The latter result lends credence to the view that controls shifted the burden of adjustment from quantity to prices.

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“…Individual country crises that involved controls on outflows have been studied extensively, but systematic cross-country comparisons are rare. For instance, the Malaysian introduction of capital controls on outflows in the context of the AFC has been thoroughly analyzed in Ariyoshi et al (2000), Edison and Reinhart (2000), Dornbusch (2001), Kaplan and Rodrik (2002), Tamirisa (2004), andEpstein et al (2008). Overall, the literature finds that the Malaysian controls have been effective in eliminating the offshore ringgit market and have been modestly successful in supporting a more rapid economic recovery.…”

Section: Literature Surveymentioning

confidence: 99%