Motivations for Capital Controls and Their Effectiveness

Pandey, Radhika; Pasricha, Gurnain Kaur; Patnaik, Ila; Shah, Ajay

doi:10.2139/ssrn.2651140

Cited by 13 publications

(16 citation statements)

References 32 publications

(36 reference statements)

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“…Hutchison, Pasricha and Singh (2013) find that even in a country with extensive capital controls, these controls were able to sustain a covered interest rate differential between onshore and offshore markets only in periods in which these controls were actively tightened. Further capital controls do not seem to have a clear effect on currency appreciation in most cases (Pandey et al, 2015;Jinjarak et al, 2013), with the exception of Chile in the 1990s (Edwards and Rigobon, 2009). 5 Existing tests of the trilemma are based on testing whether the indices of (levels) of capital controls, monetary policy autonomy and exchange rate stability add to a constant (Aizenman, Chinn and Ito, 2010) or whether nominal interest rates in a country respond more to foreign interest rates in countries with more open capital accounts and less flexible exchange rates (Obstfeld, Shambaugh and Taylor, 2005) or testing comovements of asset prices with the global financial cycle (Rey, 2015).…”

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confidence: 87%

Domestic and multilateral effects of capital controls in emerging markets

Pasricha

Falagiarda

Bijsterbosch

et al. 2018

Journal of International Economics

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Using a novel, high frequency dataset on capital control actions in 16 emerging market economies (EMEs) from 2001 to 2012, we provide new insights into the domestic and multilateral effects of capital controls. Increases in capital account openness reduce monetary policy autonomy and increase exchange rate stability, confirming the constraints of the monetary policy trilemma. Both gross in-and outflows rise, while the effect on net capital flows is ambiguous. Tighter capital inflow restrictions generated significant spillovers, especially in the post-2008 environment of abundant global liquidity. We also find evidence of a domestic policy response to foreign capital control changes in countries that are affected by these spillovers.

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confidence: 87%

Domestic and multilateral effects of capital controls in emerging markets

Pasricha

Falagiarda

Bijsterbosch

et al. 2018

Journal of International Economics

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“…Since the end of Bretton Woods, capital controls have been used largely by emerging and developing economies, and evidence of their effectiveness is available only for these countries. The recent literature has attempted to better measure the usage of these tools (e.g., Pasricha (2012), Pandey et al (2015), Forbes et al (2015), Pasricha et al (2015)) and to design more robust tests for assessing their effectiveness as macroprudential tools.…”

Section: Limiting the Effects Of Integrated Capital Marketsmentioning

confidence: 99%

“…They find no evidence that any tightening of controls was effective in reducing the magnitudes of capital inflows. Pandey et al (2015) focus on controls on foreign borrowing in India over the period 2004-13, and using a propensity score matching (PSM) methodology that controls for selection bias, do not find evidence that these controls were effective in stemming domestic credit growth. Forbes et al (2015) also use PSM for a larger sample of 60 countries over the period 2009-11 and find that capital controls did not achieve their stated aims (specifically, influencing exchange rates, capital flows, interest-rate differentials, inflation, equity indices, and different volatilities).…”

Section: Limiting the Effects Of Integrated Capital Marketsmentioning

confidence: 99%

The Global Financial Cycle, Monetary Policies, and Macroprudential Regulations in Small, Open Economies

Bauer

Pasricha

Sekkel

et al. 2018

Canadian Public Policy

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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 EconStor may Non-Technical SummaryThis paper offers an overview of the implications of the global financial cycle for conventional and unconventional monetary policies and macroprudential policy in small, open economies (SOEs) such as Canada. We start by reviewing the recent evidence on financial cycles. An important new finding is that national financial cycles may have been partly subsumed into a global financial cycle. The global financial cycle is driven, in part, by monetary policy decisions in the United States. Low-for-long U.S. policy rates cause global financial intermediaries to search for yield, which in turn leads to a decline in the cross-section of international risk premia. Risk premia form an important part of conventional and unconventional monetary policy transmission mechanisms in both large and small economies.Next, we review the available policy actions that could be undertaken by SOE central banks and regulatory authorities to limit the effects of the global financial cycle. We show that conventional monetary policy actions in both large and small economies are affected by movements in global risk premia. The paper also examines the effectiveness of unconventional monetary policies originating in SOEs that are not coordinated with those in large countries.If unconventional policies undertaken during financial crises are not completely effective in restoring output or inflation to their target levels, the question then arises as to whether central banks can use more aggressive conventional monetary actions to lean against the buildup of debt associated with the boom phase of the global financial cycle. We highlight new work that evaluates the potential for central banks to lean against the winds of the global financial cycle. This new work shows that the cost of leaning is quite high relative to the benefits of lowering the likelihood of either entering a house price correction episode or of triggering a new financial crisis.We then assess to what extent macroprudential policy tools could be an alternative to curb increased risk-taking behaviour during the boom phase of the cycle. In large economies, a number of macroprudential policies are designed to break the chain that links asset allocation decisions by financial intermediaries with the resultant declines in risk premia. Such policies are likely to be less effective in SOEs, as global premia will likely not change in the face of portfolio switches by s...

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“…Changes in capital inflow controls in India responded systematically to exchange rate pressures, presumably in an attempt to moderate exchange rate movements. This issue is addressed directly using an event study methodology by Pandey et al (2015). A figure from their work is shown as .…”

Section: Capital Controls and Exchange Ratesmentioning

confidence: 99%

“…Outcomes the weeks after the CCA are compared between the treatment and control groups. Figure 10 which is an updated version of the one in Pandey et al (2015) plots the difference between nominal INR-USD spot exchange rate between treatment and control weeks for easing of capital controls on foreign borrowing. It shows no significant difference between the outcomes after easing CCAs and the outcomes in control periods.…”

Section: Capital Controls and Exchange Ratesmentioning

confidence: 99%