Regulating Capital Flows at Both Ends: Does it Work?

Abstract

This paper examines whether cross-border capital flows can be regulated by imposing capital account restrictions (CARs) in both source and recipient countries, as was originally advocated by John Maynard Keynes and Harry Dexter White. To this end, we use data on bilateral cross-border bank flows from 31 source to 76 recipient (advanced and emerging market) countries over 1995-2012, and combine this information with a new and comprehensive dataset on various outflow and inflow related capital controls and prudential measures in these countries. Our findings suggest that CARs at either end can significantly influence the volume of cross-border bank flows, with restrictions at both ends associated with a larger reduction in flows. We also find evidence of cross-border spillovers whereby inflow restrictions imposed by countries are associated with larger flows to other countries. These findings suggest a useful scope for policy coordination between source and recipient countries, as well as among recipient countries, to better manage potentially disruptive flows.

Country Characteristics in Foreign Bank Investments and Risk Taking: The Role of Shared Culture, Common Institutions and Geographic Proximity

“…Furthermore, these higher values can also be attributed to our use of claims shares, as opposed to flows, as our dependent variable. This is in line with previous evidence: surveying the empirical literature on cross‐border capital investments, Ghosh et al () finds that R‐squared values are generally higher in studies using claims data rather than flows data.…”

What Drives Capital Flows to Emerging Markets? A Survey of the Empirical Literature

“…In addition, Ghosh et al . () find a negative impact of U.S. real interest rates on cross‐border banking flows to a sample of 76 countries, both emerging and mature (also based on BIS locational banking statistics).…”

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

“…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. Pasricha et al (2015) find that a net inflow tightening in Brazil, Russia, India, China and South Africa increases net capital inflows in other emerging market economies, especially in connection with crossborder bank lending.…”

“…5 The exception beingGhosh et al (2014), who focus on 76 recipient countries and include both advanced and emerging market economies in their analysis.…”