Controlling Capital: Capital Flow Volatility in Emerging Market Economies

Abstract

This paper examines the effectiveness of capital control measures in a sample of 10 emerging market economies in Asia and Latin America. We extend a novel panel data set containing measures of capital controls for the years 2005-2012, disaggregated by inflows and outflows. Private capital flows, which include net inflows, gross inflows, and gross outflows, are typically volatile for all countries. Using a fixed effects model we find that capital inflow\ud restrictions are able to reduce gross inflow volatility, but we find little effect of outflow\ud restrictions on gross outflow volatility. We find no strong evidence that institutional quality has an effect on capital flow volatility. Additionally, given the dynamics and individual country effects, we use the panel vector auto-regression approach to examine the effectiveness of capital outflow controls on gross outflow volatility and net inflow volatility. We find that a tightening of outflow controls increases net capital inflow volatility. These results emphasize the role of capital account restrictions on cross-border financial transactions. We conclude that capital controls can affect the volatility of capital flows