Capital Controls: An Evaluation

The literature on capital controls has (at least) four very serious apples-to-oranges problems: (i) There is not unified theoretical framework to analyze the macroeconomic consequences of controls; (ii) there is significant heterogeneity across countries and time in the control measures implemented; (iii) there are multiple definitions of what constitutes a "success" and (iv) the empirical studies lack a common methodology -- furthermore these are significantly "overweighted" by a couple of country cases (Chile and Malaysia). In this paper, we attempt to address some of these shortcomings by: being very explicit about what measures are construed as capital controls. Also, given that success is measured so differently across studies, we sought to "standardize" the results of over 30 empirical studies we summarize in this paper. The standardization was done by constructing two indices of capital controls: Capital Controls Effectiveness Index (CCE Index), and Weighted Capital Control Effectiveness Index (WCCE Index). The difference between them lies only in that the WCCE controls for the differentiated degree of methodological rigor applied to draw conclusions in each of the considered papers. Inasmuch as possible, we bring to bear the experiences of less well known episodes than those of Chile and Malaysia.

Income Distribution, Factor Endowments, and Trade Revisited: The Role of Non-Tradable Goods

We return to the traditional theme of the distributive consequences of international prices and trade policies, focusing on economies relatively abundant in natural resources with a large non-tradable-goods sector. Changes in international prices create an aggregate demand effect which impacts on the earnings of factors employed in the non-traded goods sector. We show that, in economies highly specialized in the production of tradable goods and where the import-competing sector is small, under standard assumptions, terms-of- trade shifts have a neutral effect on factor prices and thus lack distributive effects, quite differently from Stolper-Samuelson scenarios. In economies with sizable import-competing sectors and two ?urban? productive factors (e.g. skilled and unskilled labor), changes in the terms of trade do induce distributional tensions through two channels: (i) the exogenous shift in the relative price of tradable goods, and (ii) the endogenous displacement of the demand for non-tradables. We illustrate how, according to the structure of the economy, different patterns of income distribution may arise. Next, we analyze the introduction of trade duties. Trade taxes change relative prices between tradable goods as a terms-of-trade shock does, but also introduce an additional demand mechanism, that depends on the use the government gives to the revenues. If the tax revenues are transferred back to the private sector, the resulting reallocation of spending favors those factors used intensively in the production of non-tradables.Fil: Galiani, Sebastian. University of Maryland; Estados UnidosFil: Heymann, Carlos Daniel. Consejo Nacional de Investigaciones Científicas y Técnicas. Oficina de Coordinación Administrativa Saavedra 15. Instituto Interdisciplinario de Economía Politica de Buenos Aires. Universidad de Buenos Aires. Facultad de Ciencias Económicas. Instituto Interdisciplinario de Economía Politica de Buenos Aires; ArgentinaFil: Magud, Nicolas E.. International Monetary Fund.; Estados Unido

Capital Controls: A Meta-analysis Approach

In this note we summarize our recent paper, where we delved into the details of this apple-to-oranges problem with the aim of defining a minimum common ground. We begin our analysis by explicitly documenting the kinds of measures that are construed as capital controls. Along the way, we describe the more drastic differences across countries/episodes and between controls on inflows and outflows as well a more subtle differences in types of inflow or outflow controls. Given that success is measured differently across studies, we standardize (to some degree) the results across studies. Inasmuch as possible, we highlight episodes that are less well known than the heavily analyzed cases of Chile and Malaysia. Our results are based on a meta-analysis of 37 empirical studies.capital controls, capital inflows, exchange rate, monetary policy

Capital controls: An evaluation

The literature on capital controls has (at least) four very serious apples-to-oranges problems: (i) There is not unified theoretical framework to analyze the macroeconomic consequences of controls; (ii) there is significant heterogeneity across countries and time in the control measures implemented; (iii) there are multiple definitions of what constitutes a “success” and (iv) the empirical studies lack a common methodology – furthermore these are significantly “overweighted” by a couple of country cases (Chile and Malaysia). In this paper, we attempt to address some of these shortcomings by: being very explicit about what measures are construed as capital controls. Also, given that success is measured so differently across studies, we sought to “standardize” the results of over 30 empirical studies we summarize in this paper. The standardization was done by constructing two indices of capital controls: Capital Controls Effectiveness Index (CCE Index), and Weighted Capital Control Effectiveness Index (WCCE Index). The difference between them lies only in that the WCCE controls for the differentiated degree of methodological rigor applied to draw conclusions in each of the considered papers. Inasmuch as possible, we bring to bear the experiences of less well known episodes than those of Chile and Malaysia.capital controls monetary policy financial crises contagion hot money

Capital controls: myth and reality, a portfolio balance approach to capital controls

The literature on capital controls has (at least) four very serious apples-to-oranges problems: (i) There is no unified theoretical framework to analyze the macroeconomic consequences of controls; (ii) there is significant heterogeneity across countries and time in the control measures implemented; (iii) there are multiple definitions of what constitutes a "success" and (iv) the empirical studies lack a common methodology--furthermore these are significantly "overweighted" by a couple of country cases (Chile and Malaysia). In this paper, we attempt to address some of these shortcomings by: being very explicit about what measures are construed as capital controls. Also, given that success is measured so differently across studies, we sought to "standardize" the results of over 30 empirical studies we summarize in this paper. The standardization was done by constructing two indices of capital controls: Capital Controls Effectiveness Index (CCE Index), and Weighted Capital Control Effectiveness Index (WCCE Index). The difference between them lies in that the WCCE controls for the differentiated degree of methodological rigor applied to draw conclusions in each of the considered papers. Inasmuch as possible, we bring to bear the experiences of less well known episodes than those of Chile and Malaysia. Then, using a portfolio balance approach we model the effects of imposing short-term capital controls. We find that there should exist country-specific characteristics for capital controls to be effective. From these simple perspective, this rationalizes why some capital controls were effective and some were not. We also show that the equivalence in effects of price- vs. quantity-capital control are conditional on the level of short-term capital flows.

Capital Inflows, Exchange Rate Flexibility, and Credit Booms

The prospects of expansionary monetary policies in the advanced countries for the foreseeable future have renewed the debate over policy options to cope with large capital inflows that are, at least partly, driven by low interest rates in the financial centers. Historically, capital flow bonanzas have often fueled sharp credit expansions in advanced and emerging market economies alike. Focusing primarily on emerging markets, we analyze the impact of exchange rate flexibility on credit markets during periods of large capital inflows. We show that credit grows more rapidly and its composition tilts to foreign currency in economies with less flexible exchange rate regimes, and that these results are not explained entirely by the fact that the latter attract more capital inflows than economies with more flexible regimes. Our findings thus suggest countries with less flexible exchange rate regimes may stand to benefit the most from regulatory policies that reduce banks’ incentives to tap external markets and to lend/borrow in foreign currency; these policies include marginal reserve requirements on foreign lending, currency-dependent liquidity requirements, and higher capital requirement and/or dynamic provisioning on foreign exchange loans.

Capital Controls: Myth and Reality--A Portfolio Balance Approach

The literature on capital controls has (at least) four very serious apples-to-oranges problems: (i) There is no unified theoretical framework to analyze the macroeconomic consequences of controls; (ii) there is significant heterogeneity across countries and time in the control measures implemented; (iii) there are multiple definitions of what constitutes a “success” and (iv) the empirical studies lack a common methodology--furthermore these are significantly “overweighted” by a couple of country cases (Chile and Malaysia). In this paper, we attempt to address some of these shortcomings by: being very explicit about what measures are construed as capital controls. Also, given that success is measured so differently across studies, we sought to “standardize” the results of over 30 empirical studies we summarize in this paper. The standardization was done by constructing two indices of capital controls: Capital Controls Effectiveness Index (CCE Index), and Weighted Capital Control Effectiveness Index (WCCE Index). The difference between them lies in that the WCCE controls for the differentiated degree of methodological rigor applied to draw conclusions in each of the considered papers. Inasmuch as possible, we bring to bear the experiences of less well known episodes than those of Chile and Malaysia. Then, using a portfolio balance approach we model the effects of imposing capital controls on short-term flows. We find that there should exist country-specific characteristics for capital controls to be effective. From this simple perspective, this rationalizes why some capital controls were effective and some were not. We also show that the equivalence in effects of price- vs. quantity-capital control are conditional on the level of short-term capital flows.Capital Controls

Corporate investment in emerging markets: the role of commodity prices

We examine how firm-level and country-specific macroeconomic variables determine corporate investment in emerging markets. In particular, we investigate how investment decisions are affected by changes in country-specific commodity export prices, using firmlevel data from 38 emerging markets for the period 1990–2013. We show that in addition to the standard firm-level variables (such as expected future profitability, cash flows, leverage, and new debt flows), commodity export prices play a significant role in driving corporate investment. Moreover, we show that the sharp decline in commodity prices since 2011 has been a key factor explaining the sizable slowdown in private investment growth during this period, especially in regions with large net commodity exporters